Mansion House speech: Government announces biggest pension reforms in decades

While the budget may have been relatively tame on pensions, it is now clear that pensions reform is firmly on the agenda for the new Government, which evidently believe that, when it comes to pensions, size really does matter.  

On 14 November 2024, Chancellor Rachel Reeves, delivered her Mansion House speech announcing radical action to tackle the fragmented pensions landscape, deliver investment and drive economic growth.

The biggest reforms in decades will merge Local Government Pension Scheme (LGPS) assets and consolidate multi-employer defined contribution schemes into giant megafunds.

 The reforms aim to:

• Unlock around £80 billion of investment for infrastructure and future business.
• Enable LGPS pooling, freeing up money for local public services in the long-term and securing more than £20 billion for investment in local communities.

These radical reforms, set to be introduced through the new Pension Schemes Bill 2025, aim to achieve this by consolidating defined contribution schemes and pooling the assets of 86 separate LGPS authorities. 

How will the reforms unlock investment?

The proposed reforms draw inspiration from Australia and Canada, where pension funds take advantage of size to invest in assets with higher growth potentials. For example, compared to defined contribution schemes in the UK, Canada's pension schemes invest around four times more in infrastructure, while Australia's invest around three times more in infrastructure and ten times more in private equity.

The Government says adopting a similar system and consolidating defined contribution schemes could deliver an £80 million boost to pension pots and help drive the UK's economic growth. The UK pension system is one of the largest in the world – with the LGPS and defined contribution market set to manage £1.3 trillion in assets by the end of the decade.

According to the Government’s analysis – published in the interim report of the Pensions Investment Review at Mansion House – pension funds begin to return much greater productive investment levels once the size of assets they manage reaches between £25-50 billion. At this point they are better placed to invest in a wider range of assets, such as exciting new businesses and expensive infrastructure projects. Even larger pensions funds of greater than £50 billion in assets can harness further benefits including the ability to invest directly in large scale projects such as infrastructure at lower cost.  

The Government will be consulting on proposals to take advantage of pension fund size and improve scheme governance.

How will the LGPS consolidation work?

The LGPS in England and Wales will manage assets worth around £500 billion by 2030. These assets are currently split across 86 different administering authorities, managing assets between £300 million and £30 billion, with local government officials and councillors managing each fund.  

Consolidating the assets into a small number of megafunds run by professional fund managers is intended to allow for more investment in assets like infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants.

The megafunds will need to meet rigorous standards to ensure they deliver for savers, including needing to be authorised by the Financial Conduct Authority. Governance of the Local Government Pension Scheme will also be overhauled to deliver better value from investment decisions, which government research suggests could free up money in the long-term to support local public services. 

Local economies are intended to be supercharged by the changes, as each Administering Authority will be required to specify a target for the pool’s investment in their local economy, working in partnership with Local and Mayoral Combined Authorities to identify the best opportunities to support local growth. If each Administering Authority were to set a 5% target, that would secure £20 billion of investment in local communities.  

A new independent review process will be established to ensure each of the 86 Administering Authorities is fit for purpose. What the review process entails is unknown, nor is what would happen if the Administering Authority was deemed not fit for purpose.

What are the next steps?

The closing date for both consultations is 16 January 2025.

The timescales for the reforms are ambitious to say the least. A potential target date of 2030 has been set for the consolidation of defined contribution schemes and March 2026 for LGPS assets to be pooled.

Whether this is achievable is up for debate - the Government is clearly committed to pushing these reforms forward, however there's plenty for industry to get their heads round. This may be why we are yet to hear an announcement around private Defined Benefit reforms. It was also anticipated that we would see target minimum levels of UK investment being mandated. This hasn't yet happened and is still pencilled in to be picked up under Phase 2 of the Pensions Review.  

For further information on the announced reforms, please contact Céline Mather-Franks.