Pension “mega funds” will be established as part of governmental strategies aimed at enhancing infrastructure investments.
Reforms are anticipated to “release £80bn” in investments, according to Treasury forecasts, which suggest that larger funds are capable of yielding higher returns.
Chancellor Rachel Reeves aims to emulate the operational models of substantial Canadian and Australian pension systems.
She is expected to elaborate on her proposals during a speech at Mansion House this Thursday evening.
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Rachel Reeves aims to transform pensions. Pic: PA
Nearly 90 local government pension funds will be consolidated, with defined contribution plans merged and assets pooled together.
This initiative forms part of the government’s strategy to bolster economic growth through infrastructure investments.
Pension schemes are said to generate higher returns when they reach between £20bn and £50bn in size, as they are “better positioned to invest in a diverse array of assets,” claims the government.
This assertion is supported by evidence from Canada and Australia, with the government positing that Canadian schemes invest four times more in infrastructure and Australian schemes three times more than the UK’s defined contribution plans.
Ms. Reeves asserted that this represents “the most significant series of reforms to the pensions market in decades.”
The chancellor mentioned that the modifications would “release tens of billions of pounds for investments in business and infrastructure, enhance individuals’ savings for retirement, and stimulate economic growth, ensuring that all regions of Britain benefit.”
However, Tom Selby, the public policy director at the financial firm AJ Bell, stated: “Caution is essential regarding this initiative to utilize external funds to foster economic development. It must be clearly communicated to members how their funds are being utilized.”
The government assures that the funds will be supervised by the Financial Conduct Authority and will have to “adhere to strict standards to ensure they serve the interests of savers.”
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Local government pensions versus defined contributions
The Local Government Pension Scheme in England and Wales is expected to manage assets totaling approximately £500bn by the year 2030. Currently, these assets are distributed among 86 different administering authorities, with local government officials and councillors overseeing each fund.
According to government plans, the administration of local government pensions and their investments will shift from councillors and local officials to “professional fund managers.”
This transition will enable them to invest more in assets such as infrastructure, thus supporting economic growth and local investments on behalf of the 6.7 million public employees, according to the government.
Defined contribution pension schemes are projected to manage around £800bn in assets by the decade’s end.
There are roughly 60 different multi-employer schemes, each directing savers’ funds into one or more investment portfolios. The government intends to consult on the establishment of a minimum size requirement for these funds.
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Businesses are cautious – but the pensions sector supports the initiative
Businesses will require assurances regarding the legitimacy of the government’s proposals following the implications of the budget, as indicated by the trade association, the Confederation of British Industry (CBI).
CBI’s chief economist, Louise Hellem, remarked: “While the chancellor is correct to focus on mobilizing investments and making pension reform integral to the government’s growth agenda, unlocking investment needs to coincide with the presence of competitive and profitable enterprises.”
“With the budget imposing additional burdens on businesses and tightening their capacity to invest, the government must strive to restore confidence in the UK as a prospective environment for businesses and communities to thrive.”
“Pension schemes will aspire to function within a thriving UK economy.”
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Nevertheless, significant components of the pensions sector expressed their support for the government’s initiatives, including Standard Life, Royal London, Local Pensions Partnership Investments, and the Pensions and Lifetime Savings Association.
Deputy Prime Minister Angela Rayner stated: “This initiative aims to harness the unexplored potential of the pensions held by millions, utilizing it to significantly contribute to our economy.”
