Rachel Reeves’ megafunds pensions plan comes with pitfalls, including for the financial sector in Leeds - Jayne Dowle

The Labour manifesto promised it would conduct a major review of pensions, but it’s fair to say that no-one quite expected it to start with a rehash of an idea that hit the rocks under two previous Conservative governments.

Chancellor Rachel Reeves has announced plans to merge local government pension schemes into eight “megafunds”. The Treasury claims this will be part of the biggest reform of the UK pension market in decades, sounding warning bells for anyone who hopes to retire at some point.

She is taking the model from Canada, where in the 1990s public sector pensions were amalgamated into what’s known as the ‘Maple 8’. These huge funds, worth an estimated £1.1tn in total, have become well known for investing in international infrastructure schemes, including in the UK. Similar mega funds also exist in Australia and Norway.

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The proposed pensions shake-up was announced as part of the chancellor’s inaugural Mansion House speech last week. Reeves intends to introduce a new pensions bill next year that will aim to pool assets from 86 separate local government pension schemes (LGPS) in England and Wales into megafunds, which would be worth an average of £50bn each, by 2030.

Chancellor Rachel Reeves has announced plans to merge local government pension schemes into eight 'megafunds'. PIC: Ben Birchall/PA WireChancellor Rachel Reeves has announced plans to merge local government pension schemes into eight 'megafunds'. PIC: Ben Birchall/PA Wire
Chancellor Rachel Reeves has announced plans to merge local government pension schemes into eight 'megafunds'. PIC: Ben Birchall/PA Wire

It's been tried before. In 2015, the then prime minister, David Cameron, wanted to push all local government pension scheme funds into larger pools, with the intention of cutting investment costs and allowing for collective investment in assets.

However, Cameron’s changes failed to set a deadline for consolidation. It’s reported that to date, only around 39 per cent of local government pension scheme assets have ended up being pooled into larger funds. In addition, the process came under fire for adding additional costs to individual schemes.

Then last autumn, the last Conservative chancellor, Jeremy Hunt, tried to resurrect the merger plans. His stated aim was to push the investment of all local government pension fund assets into vehicles worth £200bn or more by 2040. Those plans came to a halt with the general election.

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Hunt said on X that Reeves’s plan was “broadly same strategy and approach as I announced in the Mansion House reforms last year and vitally important for the UK tech, life sciences and infrastructure sectors”.

You can see the sense in thinking big, but Reeves needs to steel herself for challenges, starting with local councillors. She must bear in mind that they might not all take kindly to the idea of giving up control of how their pension money is invested, including those who are vociferous members of her own party.

Also, there are going to be costs – and bureaucracy – involved for cash-strapped local government. The Pensions and Lifetime Savings Association has already cautioned about the potential tax and legal outlay that could be involved in transferring further assets into larger pools. This hurdle hindered the consolidation process launched under David Cameron, it’s said.

And then there are all the lawyers, asset managers, banks and actuaries who could lose out on hundreds of millions of pounds in annual fees and contracts if such pension funds are all consolidated under huge umbrellas.

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If Labour really does support business, it needs to take this aspect very seriously indeed. Removing decision-making from such financial services sectors could have serious knock-on effects on regional cities such as Leeds, where Reeves’ own constituency is, which have become thriving centres of the industry.

The government will now run a consultation on its proposals, but critics say this is nothing more than a lip service move.

Should megafunds come to pass, the danger here is mission creep. What starts with local government pensions could easily spread to other public sector pensions, such as the NHS and teachers’ pension schemes. The fear from some quarters is that this trajectory would be allowed to proliferate without due consideration and could lead to bad decisions being made which would end up putting pension pots in jeopardy.

And if the ‘Reeves reforms’ should ever spread to personal pensions, there could be carnage. A major caveat of the amalgamated model is that it may affect the diversity of investment allowed by UK pension funds. Many investors, who prefer to put their money in ethical funds, might feel uncomfortable over potential loss of control.

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Which brings us to the major point; by asserting her own control over pensions, Reeves must not let power go to her head. She needs to proceed with caution and listen to those who know more than her. She should also honour another manifesto promise on pensions; to invest in UK PLC, not encourage excessive investment overseas.

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