Rachel Reeves has confirmed plans to set “binding” allocations in pension funds as the government prepares for the launch of “megafunds” to encourage fresh investment into UK infrastructure and businesses.
The Treasury said it would “take a reserve power” in the upcoming Pension Schemes Bill “to set binding asset allocation targets,” a move it said was designed to “provide additional certainty that individual schemes will not lose business by investing in private markets, which offer the potential for higher returns but are expensive to invest in upfront.”
The move is likely to spark consternation among pension funds who had expressed staunch opposition to the mandation of asset allocations ahead of the signing of the Mansion House Accord, a voluntary scheme to invest more into private assets.
Sir Nicholas Lyons, chairman of Phoenix Group, who led an earlier version of the pact signed by major pension funds in 2023, took issue with mandation.
Speaking at an event at the Guildhall in April, Lyons said: “I think we need to leave it to the private sector to make the right decisions around domestic buyers to listed equity capital.”
His views were echoed by British Business Bank CEO Louis Taylor, who said: “I think there are other ways of incentivising than actual mandation and I think that might go against the spirit of an open UK economy.”
Lyons added that the government should instead “retain the threat of mandation to help concentrate their minds.”
Gareth Davies, Shadow Financial Secretary to the Treasury, added: “If the Chancellor decides to go down the route of mandating investments, it will be because her poor choices mean she needs to shake down pension funds and funnel your money towards UK-based investments that her economic policies have done so much to make unattractive.”
Megafunds will ‘improve investment strategies’
The move comes as the Chancellor laid out plans for the creation of pensions megafunds, under which all multi-employer Defined Contribution pension schemes and Local Government Pension Scheme pools would be expected to operate at megafund level, managing at least £25bn in assets by 2030.
The move, which mirrors similar steps taken in Australia and Canada, is designed to tackle the gradual decline in domestic investment from UK pension funds, where around 20 per cent of Defined Contribution assets are currently invested compared to over 50 per cent in 2012.
It is hoped the creation of megafunds would save as much as £2bn a year through economies of scale and improved investment strategies. The government claims that an average earner who saves over their career could see a £6,000 boost to their Defined Contribution pension pot as a result.
Deputy Prime Minister, Angela Rayner said: “The untapped potential of the £392bn Local Government Pension Scheme is enormous.
“Through these reforms we will make sure it drives growth and opportunities in communities across the country for years to come – delivering on our Plan for Change.”
In a relaxation of earlier proposals, the Treasury confirmed that schemes worth over £10bn that are unable to reach the minimum size requirement by the end of the decade will be allowed to continue operating, as long as they can “demonstrate a clear plan” to reach £25bn by 2035.
