Key messages from the speech
Reeves noted in her speech that although the UK pension system is one of the largest in the world, set to manage more than £1.3tn in assets by the end of the decade, it is also highly fragmented, lacking the economies of scale required to invest in business growth or infrastructure projects. According to Government analysis published in the interim report of the Pensions Investment Review, pension funds begin to return ‘‘much greater productive investment levels once the size of assets they manage reaches between £25-50bn.” Further economic and investment benefits are unlocked with even larger pension funds of more than £50bn.
Following the successful Canadian and Australian models
According to the Government, a more effective pension model can be found in Canada and Australia. Compared to Defined Contribution (DC) schemes in the UK, Canada’s pension schemes are estimated to invest around four times more in infrastructure, while Australia’s pension schemes invest around three times more in infrastructure and ten times more in private equity. As Reeves pointed out in her speech,
One of the key reasons for this is the much larger size of their funds. While our pensions landscape remains highly fragmented, that means many of our pension funds do not have the capacity to invest at the scale required.
Introducing new consolidated megafunds
As a result, Reeves announced that in January 2025, the Government is planning to launch a consultation on creating ‘pension megafunds’ that will be able to take advantage of the economies of scale larger funds can enjoy, while ensuring these funds have the necessary governance and regulation in place. If the consultation is successful, the reforms are expected to be introduced through a new Pension Schemes Bill in 2025.
How will megafunds work?
The Pension Schemes Bill will create ‘megafunds’ with a two-step approach. First, it will pool all of the pension assets held by 86 Local Government Pension Scheme (LGPS) authorities. Second, it will encourage consolidation within the DC marketplace by introducing minimum size requirements schemes used for auto-enrolment. It will also set an upper limit for the maximum number of such schemes. This is aimed at encouraging mergers and reduce market fragmentation.
According to the interim Pensions Report,
This will set the DC workplace market and the LGPS onto a path of fewer, larger funds, which are better positioned to invest in productive assets, more able to deliver greater returns for members of DC schemes and give greater value for local taxpayers.
The Government believes that – as well as helping to boost pension pots for savers – consolidating the LGPS and DC schemes into megafunds could unlock around £80bn of investment, which could then be used to help fund infrastructure projects and fast-growing unlisted UK companies. Pension funds with more than £50bn in assets will also be able to invest in large scale projects at lower cost. Pension Minister Emma Reynolds said the Government’s ‘megafund’ plans were a “win-win” situation which will help savers invest in a diverse range of assets.
Reforming regulation to generate growth
Rachel Reeves also used her Mansion House speech to outline proposed regulatory changes. She pointed out that the UK has been “regulating for risk, but not regulating for growth,” and that now was the time to change this.
Ms Reeves said,
While it was right that successive Governments made regulatory changes after the global financial crisis to ensure that regulation kept pace with the global economy of the time, it is important that we learn the lessons of the past. These changes have resulted in a system which sought to eliminate risk-taking. That has gone too far and, in places, it has had unintended consequences which we must now address.
The Chancellor also said the Financial Conduct Authority (FCA) would consult on changes to financial advice and guidance to ensure people get the financial assistance and guidance they need.
Driving competition across financial services and firing up economic growth
Rachel Reeves also confirmed that in Spring 2025, the Government will announce the first-ever Financial Services Growth and Competitiveness Strategy, which will be published alongside the Government’s 10-year modern Industrial Strategy. This will prioritise growth opportunities across financial services, including FinTech, sustainable finance, asset management and wholesale services, insurance and reinsurance, and capital markets.
While noting that the UK could not afford to take its status as a global financial centre “for granted,” she said,
In a highly competitive world, we need to earn that status and we need to work to keep it.
The Chancellor also said she would be looking to reset the UK’s relationship with the European Union, and strengthening partnerships with established and fast-growing financial centres.
An insight from EQ
Whilst scale is important, the Government must not lose sight of the fact that people still need to be engaged with their pensions. This is why it is important that schemes have multiple channels and a platform that can accommodate these to manage larger scale pensions.
EQ are pension data experts, used to providing data solutions on sensitive and highly complex projects, and we specialise in managing the challenge at scale. With technology at our core, our pension platforms can support clients with all their pension administration needs.
If you want to work with a trusted pensions partner on sensitive and highly complex pension data projects that specialises in managing challenges at scale, get in touch.