The key focus of The Chancellor, Rachel Reeves’, Mansion House speech last Thursday was a commitment to driving UK growth and investment primarily by pooling pension assets and removing regulatory barriers.
The Local Government Pension Scheme (LGPS) was in the spotlight as one of the main investment drivers. The Chancellor hopes to unlock £80 billion of productive investments by replicating the successful Australian and Canadian style pension “megafunds”. The proposal is to merge the LGPS’ £500 billion of projected assets (2030 prediction) into a handful of megafunds. This will allow the fund to be managed more efficiently and allow investment into bigger projects, in turn creating a meaningful drive in UK economic growth and productivity. The LGPS assets are currently split across 86 different authorities, with each fund being separately managed by the local government officials and councillors. The LGPS megafund will be split into 8 pre-existing asset pools, run by professional fund managers authorised by the Financial Conduct Authority (FCA). The FCA authorisation mirrors the Canadian approach and savers can find comfort in the more rigorous standards each investment decision will have to meet. However, as the LGPS provides defined benefit pensions, members of those schemes are less concerned about investment growth as their final benefits are of a set level.
The Labour Government’s view is that bigger is better when it comes to the scale of investment. The Pension Investment Review has shown that investments start to show a bigger return once they reach £25 billion, but £50 billion is where the real value is seen. With the now significant asset pool to play with, the hope is that the LGPS fund will be invested in and give a much-needed boost to UK infrastructure as well as growing UK businesses, including tech startups. The recently formed National Infrastructure and Service Transformation Authority (NISTA) has been set up to facilitate and drive attractive investment opportunities into the market over the next ten years. Further detail is expected during the consultation; however, it will be interesting to see whether any specific guarantees are provided by the Government if the infrastructure projects do not provide the expected levels of return, or whether the local authorities will bear all of this risk.
It’s not just the LGPS funds that are being consolidated, an estimated 60 smaller multi-employer defined contribution schemes are also set to be merged to combat the issue of billions of pounds sat in old legacy defaults. The Government will further consult on setting minimum size requirements for such schemes to ensure they are meeting their investment potential and ultimately, delivering higher returns to savers. This consolidation will require a legislative overhaul to get around the need for individual member’s consent to permit a bulk transfer into the megafunds. A “not before 2030” deadline has been given to reflect that this will be a huge exercise. Again, further detail is awaited to answer important questions such as how the “higher returns” will be measured and the extent to which the Government will take responsibility if those higher returns are not achieved in practice. This is especially important for defined contribution members as the value of their pension is based directly on the value of their fund.
Rachel Reeves promises a boost to the UK economy by more efficiently managing existing pension funds with a pensions framework that has already been a proven success overseas. There are, however, concerns that the new measures are primarily intended to boost the UK economy and to pay for UK infrastructure projects (without the need for the Government to fund them directly), rather than being designed to provide the best outcomes for pension scheme members. We will continue to report on the consultations to follow and provide updates on these new developments in the pensions sphere.