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The two weeks since Rachel Reeves delivered her first UK Budget as chancellor have been a bit of a downer. Businesses have griped over his tax increases, gold yields have been nudged up and the election of tariff-loving Donald Trump in America has further clouded the UK’s growth outlook. As part of his annual Mansion House speech on Friday evening, he tried to lift the mood by unveiling plans to boost Britain’s investment in productive assets with capital from the country’s vast pension fund.
Britain’s pension pot – estimated at £3tn in assets – is one of the world’s largest, but also one of the most fragmented. The 8,000-plus funds include defined benefit schemes (which provide a certain income), defined contribution schemes (which generate income based on individual investments), and the public sector Local Government Pension Scheme. Together, they allocate only 4.4 percent to UK equities, and around 6 percent to private equity and infrastructure assets – the type of investment that, if more, will support the growth of Britain’s economy and DC savers’ return.
The chancellor’s strategy is built on the reform of the Mansion House before Jeremy Hunt in 2023. Reeves plans to speed up the consolidation of the UK pension pot, mirroring the superfunds in Australia and Canada. They want to force the existing 86 LGPS funds to merge into eight pools. Currently, less than half of the £400bn in assets are held in larger pools. They also have plans to impose minimum size requirements on multi-employer DC schemes, which are forecast to manage £800bn of assets by the end of the decade. The government reckons the two measures could unlock around £80bn to invest in start-up and infrastructure projects.
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Consolidation makes sense. Larger funds can lower their unit costs by saving on the costs and bureaucracy involved in managing smaller pots. They can make larger investments, and better manage the risks associated with higher-yielding assets such as in infrastructure, innovative businesses and the private market.
Still, the chancellor’s plan does not guarantee that productive pension investment in the UK will increase. Canada’s public sector pensions have a lower housing bias than the LGPS, according to New Financial, a think-tank. Reeves also rightly refused funds to make domestic investments. After all, trustees should have the flexibility to act in the best interests of their beneficiaries. The DB LGPS scheme has specific responsibilities to fulfill.
To switch calls, fund managers need to be sure that there are eligible returns in the UK. For that, investors should see how to reform government planning, industrial strategies and initiatives to raise public investment in green energy and infrastructure. Targeted tax relief can also play a role.
The fund must also be run professionally, with proper risk controls to protect money and supervision from the authorities. Larger funds should help attract more skilled portfolio managers. When it comes to collecting LGPS in particular, input from local authorities will remain important to channel investment into regional startups and good infrastructure projects. Finally, the emphasis on consolidation should not ignore the importance of increasing contributions to the pension pot over time, too. Australia has been particularly successful in doing this.
The success of Reeves’ proposal will ultimately depend on how well his growth strategy convinces fund managers about the UK’s prospects. But amassing more of the state’s pension arsenal frees up cash for productive investment. With effective implementation, this should also generate better returns for savers.
