UK chancellor moots massive pension reforms
UK Chancellor Rachel Reeves’ plan to create pension megafunds could be a boost to private credit as she seeks to stimulate investment in a wider range of assets.
In what are set to be the biggest pension reforms in decades, Reeves aims to increase pensions through consolidating defined contribution schemes and pooling assets from the 86 separate Local Government Pension Scheme authorities.
She will use her first Mansion House speech today (14 November) to announce bold action to tackle the fragmented pensions landscape, deliver greater investment and drive economic growth.
The reforms, which will be introduced through a new Pension Schemes Bill next year, will mirror systems in Australia and Canada, where pension funds take advantage of their size to invest in assets that have higher growth potential.
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Reeves hopes this will deliver around £80bn of investment in new businesses and critical infrastructure while boosting defined contribution savers’ pension pots.
“Last month’s Budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we’re going for growth,” Reeves said.
“That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britian better off.”
The UK pension system is already one of the largest in the world, with the Local Government Pension Scheme and defined contribution market set to manage £1.3trn in assets by the end of the decade.
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However, the pension landscape is fragmented. Government analysis has concluded that pension funds begin to return greater productive investment levels once the size of assets they manage reaches between £25-50bn, when they become better placed to invest in a wider range of assets.
Even larger pensions funds of greater than £50bn in assets can harness further benefits, including the ability to invest directly in large scale projects such as infrastructure at lower cost.
Canada’s pension schemes invest around four times more in infrastructure, while Australia pension schemes invest around three times more in infrastructure and 10 times more in private equity, such as businesses, compared to defined contribution schemes in the UK.
Benchmarking against domestic and international examples show how consolidation of the Local Government Pension Scheme and defined contribution schemes into megafunds could unlock around £80bn of investment in productive investments like infrastructure and fast-growing companies.
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