The chancellor has announced plans to merge local government retirement schemes into eight Canada-style ‘megafunds’

Rachel Reeves has announced plans to merge local government retirement schemes into eight Canada-style “megafunds” in what the Treasury claims will be part of the biggest reform of the UK pension market in decades.

So what will the changes, announced as part of the chancellor’s inaugural Mansion House speech on Thursday, actually mean for UK pensions and what can they achieve?

What is Reeves planning?
The chancellor plans to introduce a new pensions bill next year that will aim to pool assets from 86 separate local government pension schemes (LGPS) in England and Wales into eight “megafunds”, worth an average of £50bn each, by 2030.

Reeves is also planning to consolidate smaller defined contribution schemes across the UK from private businesses into pools of £25bn to £50bn.

There have long been questions over how to handle the UK’s fragmented pension landscape, including the assets of the LGPS, which together represent one of the world’s largest defined-benefit schemes with 6.5 million members and £360bn in assets.

The LGPS are the gold plated pensions of local government workers in England and Wales, which offer secure income for retirees, including final salaries of pensioners who joined before 2014 and a career-average salary scheme to those who came in after.

What is the point of these ‘megafunds’?
The government is aiming to emulate the pension success stories of countries such as Australia, Canada and Norway, where public sector pension schemes have been consolidated into larger funds that are managed in-house by professional investors.

The idea is that bigger retirement funds can invest larger sums of money into a wider range of riskier and long-term assets such as infrastructure, startups and direct stakes in private businesses, known as private equity. While the government has not mandated where the pooled retirement money would go, the hope is a large portion would naturally flow into the UK’s own growing businesses and infrastructure projects.

Pooling assets would help cut costs, slashing the fees paid to teams of lawyers, banks, advisers, asset managers and actuaries deployed to help individual funds each year.

Many point to success stories in Canada, where a handful of schemes, known as the Maple 8, collectively manage around $2tn (£1.1tn) in taxpayer-backed pension schemes for the likes of teachers, municipal employees and healthcare workers. The Maple 8, created after a series of reforms meant to address underfunding in the 1990s, have become well known for investing in infrastructure schemes across the globe, including in the UK.

The Labour government not only wants more cash for UK projects, but believes UK pensioners should benefit from any returns on investment.

What do these overseas ‘megafunds’ invest in?
Foreign “megafunds” such as the Ontario Teachers’ Pension Plan and British Columbia Investment Management Corporation have invested in portions of the UK’s gas network, while others have taken stakes in UK ports, offices, shopping centres and other utilities.

Overnight, the news broke that PSP Investments – which manages the retirement funds for the Canadian armed forces and Royal Canadian Mounted Police – had bought the operator of Aberdeen, Glasgow and Southampton airports from Ferrovial and Macquarie in a £1.5bn deal.

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