At first glance, it seems Chancellor Rachel Reeves’ latest missive to create a series of UK pension megafunds, announced in her Mansion House speech last night – but, as is now usual, well trailed in the press the day before – has been better received than her Budget.

She has promised more detail will be provided in the Pensions Schemes Bill next year but the overriding aim is to force greater consolidation of the UK’s fragmented pension industry. This includes the near £400-bn Local Government Pension Scheme (LGPS) and the UK’s highly fragmented landscape of DC pension schemes – there are nearly 27,000 in the UK.

There had been rumours that Reeves would mandate the LGPS to consolidate into one super fund; but she has chosen instead to encourage them to accelerate the journey they are already on by consolidating the underlying local authority pension schemes (there are 86 in total) in each of the eight LGPS. Doing so will, she told the FT, create eight pools that would each have around £50bn in assets by 2030.

In addition, the massively fragmented DC landscape is in her eye too. DC schemes have already been undergoing a rapid period of consolidation with the number of schemes falling by an average of 11% per year. Reeves is hoping to speed this up and create a series of DC multiemployer master trusts which will each manage between £25bn – £50bn by 2030.

Her key message is that consolidating the UK pension industry will free up £80bn of investment, thereby enabling these larger pension schemes to be able to invest in major infrastructure projects – hopefully in the UK – like their Canadian and Australian counterparts.

So far, the reception from the pension industry has been broadly positive – possibly accompanied by a sigh of relief that she has chosen not to go down the route of mandating them to invest a specific proportion of their assets in UK assets, as some had feared.

In advance of the Mansion House speech, UK pension funds raised concerns that being forced to buy British assets to increase domestic investment could see them acting against their fiduciary duty. Their overriding goal is to invest in assets to ensure payouts to end-pensioners, which might not always involve (UK) infrastructure opportunities. Further, reducing to eight pools doesn’t mitigate potential liquidity issues.

Other countries have opted not to mandate schemes to invest domestically but rather encouraged them to do so through incentives such as tax breaks. However, there remains the thorny issue of whether there are sufficient infrastructure opportunities in the UK for the pensions industry to even invest in.

The creation of these mega pension funds will certainly give them the scale to invest in major infrastructure projects in the UK; but it will also give them the scale to invest anywhere in the world.

Once the consolidation is in train, key will be how the Government progresses with its plans to speed up planning permission for infrastructure projects – if that doesn’t work in tandem, these mega pension funds may be looking elsewhere to make their capital work for them.

For specialist private assets providers – specifically those with expertise in UK infrastructure – it is a positive result. For others, a shrinking pool of assets has become even smaller, adding further impetus to refine sales, marketing and communications programmes to access assets in other channels if these businesses are to grow.

Image by Lauren Hurley