The government will consult on setting a minimum size for multi-employer defined contribution schemes and will demand that local government pension funds pool their assets into “a handful of megafunds” in future, the chancellor is expected to say later today.

The announcement has been made ahead of chancellor Rachel Reeves giving her first Mansion House speech to City executives on Wednesday evening. mallowstreet understands the consultations, along with the interim report on the Pensions Review, will be published tonight.

Reeves called the new government’s plans “the biggest set of reforms to the pensions market in decades” that would “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 Britain better off”. 

The secretary of state for Housing, Communities and Local Government Angela Rayner said it was time pensions worked just as hard as frontline workers, using the “untapped” potential of pensions. 

Pensions minister Emma Reynolds, who also has a role in the Treasury, said the reforms could channel £80bn of investment into new businesses and critical infrastructure: “Harnessing the power of this multi-billion-pound industry is a win-win, benefitting future pensioners, and our wider economy.” 

The government has not yet published the detail of its plans but noted there were currently about 60 DC multi-employer schemes, saying: “The government will consult on setting a minimum size requirement for these funds to ensure they deliver on their investment potential.” 

The minimum size could range from £25bn to £50bn - currently only the three largest master trusts can boast to have at least £25bn - and would apply to contract-based as well as trust-based providers, the Financial Times reports. 

There will also be consultation on “measures to facilitate this consolidation into megafunds, including legislating to allow fund managers to more easily move savers from underperforming schemes to ones that deliver higher returns for them”. 

On the Local Government Pension Scheme, the option of full-blown mergers appears to have been avoided. The government said that consolidating the assets of LGPS funds into “a handful of megafunds run by professional fund managers” would allow them to invest more in assets like infrastructure. 

The Pensions Regulator has welcomed the “bold” reforms, with chief executive Nausicaa Delfas saying larger schemes would be better able to deliver for savers and invest in the UK economy, and adding that TPR will encourage innovation in new models. 

The Trades Union Congress has indicated it is supportive of the Labour government’s plans. General Secretary Paul Nowak said trade unions will work with ministers to make sure that workers’ savings are used in their best interests: “Retirement security must be first and foremost, but working people also benefit when their pension savings help to create jobs and upgrade infrastructure where they live.” 

The pensions industry has been expecting the new government to continue in the direction of pension consolidation but potentially doing so faster than the previous government, which had proposed £200bn asset pools for local government schemes by 2040, while tighter governance requirements have so far been the means to bring about DC consolidation. 

Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association said the PLSA supports consolidation "where it is in the interests of members and represents value for money".

She said it is "crucial that funds’ fiduciary duty to invest in their members best interests is not compromised", saying whether pension capital to benefit the UK economy depends on the pipeline of assets.

"The PLSA has made a series of policy and regulatory recommendations, including fiscal incentives, to encourage that to happen.”

The director general of the Association of British Insurers, Hannah Gurga, said the ABI supports the focus on the role of pensions to drive growth in the UK economy, but added that “pension investments are for savers’ futures and any policy and investment decisions must be driven by a focus on the long-term, with savers’ interests at heart”.  

 

The proposals will probably lead to some market upheaval for DC master trusts if enacted, but those that already fulfill the expected minimum size are unfazed.  

Patrick Heath-Lay, CEO of the organisation that runs the People's Pension, which manages more than £30bn in assets, said: “The proposed reforms are a positive step forward as international evidence shows that larger scale pension schemes can offer much better long-term value and returns for savers.” 

Some smaller master trusts try to remain cautiously optimistic. TPT Retirement Solutions chief executive David Lane said weaker performers should be absorbed by stronger ones to build on early successes of the recent value for money proposals. 

 

However, he suggested scale does not automatically lead to success. “We need to ensure that the fees, performance, and choice equation is augmented,” he said, and called on the government to create “a shift in buyer behaviour” in the DC market, with a focus on high quality outcomes over a “race to the bottom”. 

For the LGPS community, the devil is in the detail.

Iain Campbell

, head of LGPS investment at Hymans Robertson, said the government appears to have stopped short of merging funds and is concentrating on continued asset pooling in the current structure, saying the term ‘megafunds’ is therefore a misnomer. 

While the details will be found out later today, he expects the proposals will be to “more strictly push more assets into the pools and have a greater say on how it’s invested”, but he believes the government does not want to undermine fiduciary duty.   

He also expects that local authority funds will only be able to set high level strategic asset allocations, rather than specifying percentages for sub-asset classes, with asset pools then deciding how to invest in detail.  

The government appears to want to make these changes “pretty urgently”, Campbell said.  

Doing so could put strain on pools, which will need to build out capabilities and invest larger sums. He thinks this could mean the deadline of March 2025 for pooling listed assets could be pushed back as a result. The extra work the reforms create could also be one reason why greater use of in-house management, used by Canada’s pension funds, has not been mentioned by the government at this stage, though he said it could come later.  

What should local authority funds do while pools are undergoing so much change? Campbell advises keeping a watchful eye: “They will have to have a strong grip on pools, so they still deliver on the day job while building out new capabilities. That’s the big thing they should focus on here."  

Local authority pension funds should also be braced for asset pools asking for greater budgets as they build out these capabilities, which has in the past caused tension at some pools.  

Joanne Donnelly, the board secretary of the LGPS Advisory Board, said it welcomes the clarity provided in the government’s announcements.

"It is clear that the government’s view is that change in the LGPS is necessary. The Board will work with funds, pools and the government to ensure that that change will be beneficial for members and employers, and that their best interests remain at the heart of the LGPS," she said.

Andrew Singh

, head of public sector investment advisory at consultancy Isio, agreed much depends on the specific announcements, but warned the strong funding position and complex structure of the LGPS should not be overlooked in policymaking.  

He said changes to the LGPS must be considered in the context of the government’s new fiscal framework, Public Sector Net Financial Liabilities, which puts LGPS liabilities on its balance sheet.  
 

Singh also has concerns over indirect influence on LGPS investment decisions.  

 

“By pooling assets into fewer, larger funds, there is a risk of shifting asset allocation decisions away from local control, potentially compromising the autonomy that has been fundamental to LGPS governance,” he said. 

Some industry professionals are calling on the government not to forget about private sector defined benefit schemes, including Isio partner

Stewart Grant Hastie

. 

 

He wants to see easier access to DB surplus: “Surpluses are currently difficult to access for many DB schemes, making it hard to put them to productive use. Greater clarity on the regulatory framework for surpluses must also be provided to unlock their potential value whilst safeguarding the security of members’ benefits and supporting trustees in meeting their fiduciary duties.” 

 

Employers should be able to access DB surplus on an ongoing basis, said

Alistair Russell-Smith

, head of corporate advisory at consultancy Spence & Partners. 

 

“There is £1.4trn of assets in UK DB schemes, and with the strong funding position of most of those schemes, this will find its way to the insurance market as quickly as transactions can be resourced, unless UK plc is incentivised to run on its DB schemes rather than insure them,” he argued.  

Ongoing surplus access should also be a topic for the LGPS, he added, to encourage charities, housing associations, universities and other institutions to participate in LGPS.   

“Let’s not have a similar asymmetric risk exposure for employers in LGPS” as in private sector DB, where employers can only access a surplus when their last employee leaves pensionable service, he said.  

“Even then, distribution of the surplus is at the discretion of the fund in England and Wales and is expected to become at the discretion of the fund in Scotland imminently. This is no incentive for employers to participate in LGPS.”