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Rachel Reeves has threatened to force town hall pension funds to pool their £360bn of assets at greater scale unless they do so voluntarily, as she launches a wider review of Britain’s pension system.
The Local Government Pension Scheme for England and Wales (LGPS) is in theory the seventh largest pension fund in the world. Yet in practice it is administered by 86 separate council pension funds, making it harder for them to achieve economies of scale when investing.
Over the past decade those funds have become more adept at working together to get economies of scale by sharing eight “asset pools” in various areas.
The previous Tory government encouraged funds to accelerate those pooling efforts, invest more in “levelling-up projects” and double their allocations to private equity — a more risky asset class due to its illiquidity — in a bid to encourage economic growth.
On Saturday Reeves said she expects pension funds which participate in the LGPS to pool money at a much larger scale so that they can invest in a wider range of UK assets.
“The government will consider legislating to mandate pooling if insufficient progress is made by March 2025,” the Treasury said in a statement. “Action will be taken to unleash the full investment might of the £360bn LGPS to make it an engine for UK growth.”
The review will also look at how to reduce the £2bn spent on annual fees by the LGPS.
The push for greater pooling is likely to stoke tensions with trustee managers of LGPS funds, who are bound by a legal duty to invest for the best interests of their members. Local councils and workers would face an increase in their contributions if investments do not deliver as expected.
Reeves’ move is the first step in a wider review of the pensions system which will be led by new pensions minister Emma Reynolds. It aims to boost investment in the UK economy, improve people’s retirement savings and tackle “waste”, including possibly by consolidation in private sector funds.
The Treasury said the review would also carry out an assessment of Britain’s “retirement adequacy”, considering how to improve people’s financial circumstances in retirement.
Reeves and Reynolds will chair a roundtable meeting with pensions industry executives on Monday to kick-start the review.
It comes after the announcement of a new pensions bill in the King’s Speech on Wednesday, which promised to ensure that small pension accounts are automatically amalgamated, and introduce a “value for money” test for defined contribution schemes.
Reeves is determined to boost British pension funds’ role in domestic business and infrastructure investment.
An investment shift by defined contribution schemes of just 1 per cent could deliver £8bn of “new productive investment” into the UK economy, the chancellor said.
On Tuesday Reeves will chair her first “growth mission board”, a new cross-government committee set up to deliver Labour’s target of achieving the highest sustained growth in the G7 group of leading advanced economies.
