UK’s Pension Reforms to Unlock Over $100 Billion

The UK government is planning to merging Local Government Pension Scheme (LGPS) assets and consolidating defined contribution (DC) schemes into ‘megafunds’ which can $101.38 billion of investment for infrastructure projects and businesses of the future.

The government will also consult on measures to facilitate this consolidation into ‘megafunds,’ including legislating to allow fund managers to more easily move savers from underperforming schemes to ones that deliver higher returns for them. The proposal is expected to be implemented next year.

The UK’s pension system is one of the largest in the world with the LGPS and DC market set to manage $1.65 trillion in assets by the end of the decade. However, the UK’s pension landscape is fragmented and lacks the size needed to invest in exciting new businesses or expensive projects like infrastructure. 

The government’s analysis published on Thursday in the interim report of the Pensions Investment Review at Mansion House showed that pension funds begin to return much greater productive investment levels once the size of assets they manage reaches between $31.68 billion and $63.36 billion.

At this point they are better placed to invest in a wider range of assets, such as exciting new businesses and expensive infrastructure projects. Even larger pensions funds of greater than $63.36 billion in assets can harness further benefits including the ability to invest directly in large scale projects such as infrastructure at lower cost. 

This is supported by evidence from Canada and Australia. Canada’s pension schemes invest around four times more in infrastructure, while Australia pension schemes invest around three times more in infrastructure and 10 times more in private equity, such as businesses, compared to Defined Contribution schemes in the UK.

Benchmarking against domestic and international examples show how consolidation of the LGPS and DC schemes into ‘megafunds’ could unlock around $101.38 billion of investment in productive investments like infrastructure and fast-growing companies. 

The government is therefore consulting on proposals to take advantage of pension fund size and improve their governance.

LGPS

The Local Government Pension Scheme in England and Wales will manage assets worth around $633.62 billion by 2030. These assets are currently split across 86 different administering authorities, managing assets between $380.17 million and $38.02 billion, with local government officials and councillors managing each fund. 

“Consolidating the assets into a handful of ‘megafunds run by professional fund managers will allow them to invest more in assets like infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants – most of whom are low-paid women – whose savings are managed,” the government said.

These ‘megafunds’ will need to meet rigorous standards to ensure they deliver for savers, such as needing to be authorised by the UK’s regulator Financial Conduct Authority (FCA).

Governance of LGPS will also be overhauled to deliver better value from investment decisions, which independent research suggests could free up money in the long-term to support local public services.

Local economies will be boosted by the changes as each Administering Authority will be required to specify a target for the pool’s investment in their local economy, working in partnership with Local and Mayoral Combined Authorities to identify the best opportunities to support local growth.

If each Administering Authority were to set a 5% target, that would secure $25.34 billion of investment in local communities. A new independent review process will be established to ensure each of the 86 Administering Authorities is fit for purpose.  

DC Schemes

DC pension schemes, which are set to manage $1.01 trillion worth of assets by 2030, have around 60 different multi-employer schemes, each investing savers’ money into one or more funds at present. The Government will consult on setting a minimum size requirement for these funds to ensure they deliver on their investment potential.