At least week’s inaugural Mansion House speech, new chancellor Rachel Reeves announced what she called ‘the biggest set of reforms to the pensions market in decades’ with the plan to merge local government pension schemes (LPGS) into a series of ‘megafunds’ along the lines of Australia’s ‘supers’.

The plan is to pool the assets from 86 LGPS in England and Wales, reportedly managing £500 billion in assets, by 2030, in order to ‘unlock’ up to £80 billion of investment for infrastructure projects.

The chancellor also indicated the government would ‘consult’ on measures such as the minimum size requirement for (DC) defined contribution pension schemes to drive further consolidation into ‘megafunds’.

However, as Nick Reeve, editor of Pensions Expert points out, much of what has been proposed for LGPS has been in the works for some time.

‘Pooling has already been extremely successful in reducing costs – something the government acknowledged in its consultation – and driving investment into local and national infrastructure such as renewable energy sources’, says Reeve.

What the government is doing is speeding up the process, but at the same time it is moving the goalposts – it wants pools to be responsible for all assets as well as providing advice to underlying funds, creating a conflict of interest and countering the progress which has been made in the private sector to separate advice and implementation, adds Reeves.

There are also concerns the needs of savers, whose money is ultimately being put at risk, will be forgotten about, warns AJ Bell’s director of public policy Tom Selby.

‘There’s a reason an occupational scheme has a trustee to look after the interests of members. Part of that is investing their money to maximise returns and get the best retirement outcomes possible.

‘Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money.

‘If it goes well, everyone can celebrate, but it’s clearly possible it will go the other way, so there needs to be some caution in this push to use other people’s money to drive economic growth.’

Pooling LGPS schemes could have an unpalatable outcome for the active fund management industry, too, which for decades has run a part of the government’s giant retirement funds.

According to the Investment Association, UK asset managers have around £266 billion in mandates from local authorities, which generated £1.3 billion of management fees and a further £180 million of performance fees in 2022-23.

If management of these funds was moved in-house, it would be a major headache for the fund management industry on top of competition from passive products.

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author (Ian Conway) and the editor (Tom Sieber) own shares in AJ Bell. 

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