Reeves to set out vision for DC ‘megafunds’

This is one of the outcomes of the interim Pension Investment Review, which will be presented by chancellor Rachel Reeves today (14 November) in her inaugural Mansion House speech. She will also set out similar consolidation plans for the Local Government Pension Scheme.

A statement released by HM Treasury last night explained that the government intends to consult on setting a minimum size requirement for multi-employer DC schemes “to ensure they deliver on their investment potential”.

It will also explore ways in which to consolidate DC schemes further into “megafunds”, including legislation to facilitate moving savers out of underperforming schemes in line with the proposed Value for Money framework.

‘Fewer, larger schemes’

Nausicaa Delfas, chief executive of the Pensions Regulator, said: “We welcome the bold reforms announced by the chancellor that will accelerate the move towards a consolidated market of fewer, larger pension schemes better equipped to deliver for savers and invest in the UK economy.

“Backed by new powers, we can make sure larger schemes deliver real value for money for pension savers and raise standards across the market, while also encouraging innovation in new models.”

The regulator has been pushing for “fewer, larger schemes” for some time as part of a future vision of the UK pension system.

In last night’s statement Reeves said that, after last month’s Budget aimed at economic stability, the government was now “going for growth”.

“That starts with the biggest set of reforms to the pensions market in decades to 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 Britian better off,” she said.

Pensions minister Emma Reynolds added: “Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy. 

“These reforms could unlock £80bn of investment into exciting new businesses and critical infrastructure.”

Lessons from overseas

Both the current and the previous governments have cited the pension systems in Canada and Australia as examples of scaling up schemes to invest in productive assets.

According to the government, Australian pension schemes invest around three times more in infrastructure and 10 times more in private equity compared to UK DC schemes.

The Treasury’s statement claimed that by mirroring these models, UK schemes could deliver around £80bn of investment into “exciting new businesses and critical infrastructure while boosting defined contribution savers’ pension pots”.

The department also cited research contained within the Pensions Investment Review that shows schemes reach “greater productive investment levels” once they reach £25bn to £50bn in assets.

“At this point they are better placed to invest in a wider range of assets, such as exciting new businesses and expensive infrastructure projects,” the Treasury said.

“Even larger pensions funds of greater than £50bn in assets can harness further benefits, including the ability to invest directly in large scale projects such as infrastructure at lower cost.”

Further reading

Opperman: Consolidation needs to be harder, better, faster, stronger (4 November 2024)

DC consolidation: A complex picture (23 April 2024)

PPI report reveals defined contribution lessons from overseas (1 November 2023)