How Rachel Reeves plans to use pension pots to fund an investment boom

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The Chancellor Rachel Reeves is set to lay out one of the most significant shake-ups of the pension system in decades today after years of calls from the City to lean on the sector to fund an investment boom.

Currently, 86 different local government pension schemes manage assets between £300m and £30bn, with local government officials and councillors looking after each fund.

However, government analysis has revealed that pension funds begin to return “much greater productive investment levels” once assets under management hit between £25 and 50bn.

The plan from Reeves will combine these “fragmented” schemes into a handful of megafunds, giving them the size to invest in new businesses or infrastructure projects.

The City has broadly welcomed the planned changes, describing them as heading in the right direction, even if they aren’t a silver bullet.

However, Reeves did not go as far as mandating pension funds to invest in the UK despite growing calls for firmer action in recent months. Those calls have been fuelled by a drop-off in investment in the UK, with just 4.4 per cent of pension cash now invested in UK stocks, down from over half of their assets 25 years ago. Play Video

‘Certainly a prize worth fighting for’

“The Chancellor appears to have recognised the challenge – and controversy – of mandating investment in asset classes so is pivoting to enforcing economies of scale to get the allocations the country needs,” said Simon Kew, head of market engagement at pensions consultancy Broadstone.

“It is pleasing to see an emphasis on supporting local growth given the strong track record some local government pension scheme funds have investing in their area,” he added.

“Freeing up pension fund investment in UK Plc and much-needed infrastructure is certainly a prize worth fighting for whilst retaining a laser-focus on value for members.”

With local government pension schemes on track to collectively manage £500bn by the end of the decade, the reforms could unlock as much as £80bn in investment for much needed areas like infrastructure, Reeves has claimed.

“Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy,” said pensions minister Emma Reynolds today.

However, concerns have been raised that the push to invest in areas like infrastructure could put pension savings into risky projects.

“Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money,” AJ Bell director of public policy Tom Selby said.

Alison Leslie, head of DC investment at Hymans Robertson, added that there is also a risk of “stifling innovation if the scale of the mega fund is too high”, which could crowd out innovative smaller providers.