What do Rachel Reeves plans for pension reform mean for you?

Rachel Reeves will announce she wants to reform the pension system in order to boost economic growth. The UK's first female Chancellor will deliver her first Mansion House speech to city chiefs at 9pm today and will announce that she wants to create pension 'megafunds' which could result in around £80bn to invest in businesses and infrastructure.

Under the plans, the reforms will be introduced through a new Pension Schemes Bill next year, consolidating defined contribution (DC) schemes and pooling assets from 86 local government pension scheme authorities. Megafunds will mirror schemes in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential, the Government said.

According to the government, the plans will secure more than £20bn for investment in local communities. Ms Reeves said: "Last month’s Budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we’re going for 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."

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Liverpool City Council's cabinet member for Growth & Economy Nick Small welcomed the move. He told the ECHO: "The Chancellor's announcement is an exciting one. Local government pension funds are underutilized. Get this right and there's a big prize, unlocking more investment, improving financial security for pensioners and boosting ethical, impactful projects locally."

But Confederation of British Industry chief economist Louise Hellem said the change had the potential to be good for investment and savers but added: “With the Budget piling additional costs on firms and squeezing their headroom to invest, the Government needs to work hard to regain the confidence in the UK as a place businesses and communities can succeed. Pension schemes will want to operate within a UK economy that is prospering.”

The £26 billion increase in employers’ national insurance contributions (NICs) announced at the Budget, which comes into effect from April, is one of the Chancellor’s decisions which has caused business unease. The British Retail Consortium, which represents supermarkets including Asda and Tesco, reportedly said in a draft letter to Ms Reeves that its members would not be able to absorb costs from increased NICs and higher minimum wage rates, making some job losses “inevitable”.

What do the plans mean for you?

What is happening under the plans?

Reforms will be introduced under a new Pension Schemes Bill next year, consolidating defined contribution (DC) schemes and pooling assets from 86 local government pension scheme authorities. There are around 60 different multi-employer schemes, each investing savers’ money into one or more funds. The Government will consult on setting a minimum size requirement for these funds.

Why does the Government think the reforms are a good idea?

It has said the changes could unlock around £80 billion of investment for infrastructure projects and businesses, helping to boost economic growth. The funds will take advantage of their size and use economies of scale, potentially helping to boost DC savers’ pension pots. The Government said analysis indicates that pension funds start to return greater productive investment levels once the size of assets they manage reaches between £25 to £50 billion.

What do they mean for pension holders?

Sir Steve Webb, a former Liberal Democrat pensions minister who is now a partner at consultants LCP (Lane Clark & Peacock), said: “It’s ultimately got to be about the members. Big isn’t always beautiful. There are some smaller pension schemes in Britain which are very good. They are heavily subsidised by employers, they offer very good pensions and it would be very unfortunate if something like that was destroyed by a crude size rule. It can’t be a crude cut-off point. It can’t be an assumption that big is always better.”

Discussing the opportunities for investment, Sir Steve told the PA news agency there is a “whole raft of things that Britain needs more money invested in”. But he said that opportunities need to be “investable”, adding: “Some of this is about supply side and making sure there are schemes to invest in. There is a lot of work to be done in this space. There is a lot to be done on whether public money can be spent to leverage in private money.”

Sir Steve said the key benchmark needed to be: “Is this in the interests of the members?” Another potential risk could be that megafunds end up being “pretty much the same”, he said, adding: “When there are a lot to choose from, there’s quite a bit of competition.” He added: “Smaller schemes can still invest in big stuff … big isn’t always best.”