Britain wants to build a slew of "megafunds" with up to 80 billion pounds ($102 billion) in fresh investment firepower, under plans for the biggest shake-up in UK pensions seen in decades, finance minister Rachel Reeves said on Wednesday.
Reeves is under pressure to address massive under-investment by UK pension funds in domestic assets, with a recent collapse in allocations cited among the reasons for Britain's lacklustre economic 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 Britain better off," she said.
Local Government Pension Schemes and defined contribution pension pots in the UK are expected to collectively manage 1.3 trillion pounds in assets by the end of the decade, but many funds lack scale individually to pursue big-ticket investments like roads, rail and airports.
According to government analysis which will be published in the interim report of the Pensions Investment Review, pension funds are better placed to invest in a wider range of assets once their assets under management reach 25-50 billion pounds.
Funds holding more than 50 billion in assets can harness even greater benefits, the analysis continued, including investing directly in large scale projects at lower cost.
The government said it would consult on measures to facilitate pension fund consolidation via a new Pension Schemes Bill next year, which would also seek to empower fund managers to more easily move savers between schemes.
These so-called "megafunds" resemble pension schemes in place in Canada and Australia, where infrastructure investment volumes are respectively four times and three times greater than those managed by UK Defined Contribution schemes.
"They (Canada and Australia) probably have the best pension funds anywhere in the world," Reeves told the BBC. "Our pension funds in Britain are too small to be making the investments that get a good return for people saving for retirement and to help our economy to grow."
The government said the funds would be authorised by the Financial Conduct Authority and subject to heavy scrutiny to ensure performance for savers, including delivering value for money in investment decisions.
Tom Frost, head of UK institutional clients at abrdn (ABDN.L), said the public was largely in favour of using pension savings to power UK businesses, housing and infrastructure but over-consolidation would usher in different risks.
"If the number of schemes is reduced to too low a number, this could limit innovation and lead to decreased competition, thereby resulting in poorer outcomes for current and future pensioners," he said.
($1 = 0.7844 pounds)
