UK Plans for Pension Megafunds

LONDON (Reuters) – Britain aims to establish a series of megafunds with up to 80 billion pounds ($102 billion) in new investment, as announced by Finance Minister Rachel Reeves on Wednesday.

Reeves is addressing massive under-investment in domestic assets by UK pension funds, which has contributed to the country's slow economic growth.

In her upcoming Mansion House address to the UK financial sector, Reeves revealed plans to consolidate about 60 defined contribution pension schemes and 86 Local Government Pension Schemes for greater cost efficiency and the capacity to support ambitious projects.

> "The last budget laid the groundwork for economic stability. Now, we are focused on growth," said Reeves.

The new pension reforms aim to unlock significant investments in business and infrastructure, enhance savings for retirement, and foster overall economic growth.

Local Government Pension Schemes and defined contribution funds are projected to manage 1.3 trillion pounds in assets by the decade's end, with many lacking the scale for large investments in vital infrastructure like roads and airports.

Government analysis indicates that funds with 25-50 billion pounds under management are better positioned for diverse investments. Those with more than 50 billion pounds can invest directly in large-scale projects at reduced costs.

Next year, the government will consult on a Pension Schemes Bill to facilitate pension fund consolidation and empower fund managers to transfer savers between schemes.

These proposed megafunds are modeled after similar schemes in Canada and Australia, which manage significantly higher volumes of infrastructure investments than UK defined contribution schemes.

The funds will be authorized by the Financial Conduct Authority and subjected to thorough scrutiny to ensure performance and value for money.

Tom Frost, head of UK institutional clients at abrdn, noted that there is public support for using pension savings to fund UK businesses and infrastructure. However, he cautioned against excessive consolidation, which could stifle innovation and competition, ultimately harming future pensioners.

> ($1 = 0.7844 pounds)