UK treasury provides guidance on local pension consolidation

In the UK, there are 86 local government pension schemes (LGPS) and more than a dozen multi-employer defined contribution pension funds that collectively manage $822 billion (£392bn) in assets. The ruling Labour Party's Treasury wants to consolidate the LGPS funds from 86 to six "megafunds" to scale their investments.

On Thursday, the Treasury released its final Pension Investment Review report, which outlines requirements and goals for consolidation, reforms that had started under Conservative Party leadership.

The Treasury aims for these consolidated megafunds to manage between $52 billion (£25bn) and $104 billion (£50bn) in assets by 2030. The Treasury aims for consolidation to allow greater infrastructure investment domestically, with the goal of emulating Canadian pension funds and Australian superannuation funds.

"Evidence from Australia and Canada shows that this size allows pension funds to invest in big infrastructure projects and private businesses, boosting the economy while potentially driving higher returns for savers," Treasury stated in announcing the report.

The Canadian pension and Australian superannuation funds are well known for being significant investors in infrastructure, including as direct investors in the asset class, and other alternative asset classes, such as private equity.

These pension funds are also renowned for their governance, and replicating their success and achieving their scale is a stated goal of Chancellor of the Exchequer Rachel Reeves.

"Countries like Canada and Australia show how powerful pension consolidation can be-having built megafunds that invest in assets that boost their economies," the Treasury stated.

"Today's reforms put the UK on the same path."

The numbers behind the plan

Consolidation could secure $105 billion (£50bn) in domestic investment and could give pension beneficiaries each a $12,500 (£6000) boost to their pension assets at retirement, according to the Treasury.

The Treasury also estimated that consolidation will reduce $2.1 billion (£1bn) per year in costs for consolidated funds by reducing fees by 10 to 20 basis points over the long term. That cost reduction is based on a 12-basis-point reduction in costs applied to $1.6 trillion (£800bn) in managed assets by 2030.

The pension consolidation will become law through the Pension Schemes Bill, expected to be introduced this summer. The deadline for local government pension scheme asset pooling is March 2026.

According to the Pension Investment Review, the Pension Scheme Bill could give the government reserve power to mandate a baseline target allocation for pensions to invest in private assets and other domestic investments.

The report's release follows the signing of the Mansion House Accord earlier this month, in which 17 UK defined contribution plans agreed to increase their alternative investment allocations to 10% of their portfolios, with at least half coming through domestic alts investments.

The government only expects to use the reserve power to set investment targets if it determines that the industry is unable to follow the guidelines of the Mansion House Accord, according to the final report.

The government will allow consolidated funds with between $20 billion (£10bn) and $52 billion (£25bn) in assets under management by 2030 to continue operating if they are able to demonstrate a plan to reach $52 billion (£25bn) AUM by 2035.

In addition, the Treasury issued its response to the options for defined benefit schemes consultation, which outlines how the more than $335 billion (£160bn) in surplus assets in UK defined benefit plans could be used.

Industry reactions

"The [Society of Pension Professionals] very much supports the government's desire for British institutions to back British businesses-wherever it is in the interests of savers to do so and without underestimating the practical challenges-and we very much look forward to continuing our engagement with policymakers to make these proposals a success," said Sophia Singleton, president of the society, in a statement.

David Lane, chief executive of TPT Retirement Solutions, said his company supports the government's ambition to increase pension investment in the UK.

"It's particularly important that the government has acknowledged factors that will enable more pension scheme investment in the UK, such as the need to focus on long-term value over cost, and the importance of a robust pipeline of investable opportunities," Lane said in a statement.

Despite industry support, the ability of the government to potentially mandate alternative investment targets has come under criticism.

"We recognise that the option to mandate private markets investment has been reserved, but we hope it won't be necessary," Lane said in the statement.

"The recently agreed Mansion House Accord should help deliver the government's private markets and UK allocation goals through industry-led collaboration."

Lane said that a voluntary approach to investing in private markets is the best option.

"The challenges of a mandated approach would be significant-raising legal concerns around fiduciary duty and potentially distorting pricing in ways that could reduce member outcomes," he continued in the statement.

"A voluntary, value-led approach remains the most sustainable path forward."

Still, many signatories of the Mansion House Accord are already investing in alternative investments beyond the accord's mandated targets, while others are committing to targets. Nest, for example, allocates about 15% of its assets under management to alternative investments, with the goal of increasing this figure to 30%.

This article first appeared in Chief Investment Officer.