The Chancellor, Rachel Reeves, has outlined detailed plans to reshape the UK’s pension system with the creation of £25 billion “megafunds”, aiming to unlock economic growth and improve pension outcomes for millions of workers.
These reforms, inspired by successful models in Canada and Australia, are designed to consolidate pension schemes, promote local investment, and deliver stronger returns for savers.
Key Elements of the Reform
The government’s plan focuses on two core pension structures:
Local Authority Pension Schemes: Currently, 86 local government schemes – managing around £392 billion in defined benefit assets for over six million members – will be consolidated into just six large asset pools by March 2026. For the first time, local investment targets will be agreed for these schemes.
Defined Contribution Schemes: Covering both public and private sector workers, these schemes – now valued at over £800 billion – will be streamlined. By 2030, the government expects to see more than 20 UK pension funds each worth over £25 billion, compared to just 10 today.
Mansion House Accord and Legislative Backing
Seventeen of the UK’s largest pension firms have already signed up to the Mansion House Accord, a voluntary agreement to allocate:
10% of assets to alternative investments (e.g. infrastructure, private equity, and start-ups), and
5% specifically to UK-based investments.
To ensure progress, the forthcoming Pension Schemes Bill will include legislative powers enabling the government to enforce the changes if voluntary measures fall short by the end of the decade. However, the Treasury has stated it does not currently expect to invoke these powers.
Industry Reactions
While some in the sector have raised concerns about government mandates on investment decisions, others have welcomed the move. Chris Rule, CEO of the Local Pensions Partnership, noted that most schemes already invest locally, but highlighted the need for high-quality investment opportunities to match demand.
Zoe Alexander of the Pensions and Lifetime Savings Association called the consolidation “significant”, citing improved governance and greater diversification as key benefits.
Former pensions minister Sir Steve Webb described the announcement as “a red-letter day” for pension savers and the broader economy, praising the government’s boldness in unlocking dormant capital.
Potential Economic and Saver Impact
According to the Treasury’s final Pensions Investment Review, these changes are expected to deliver over £50 billion in additional investment for UK infrastructure, housing, and innovation. For individual savers, the reforms could mean an average £6,000 boost to defined contribution pension pots, thanks to greater economies of scale and improved investment efficiency.
What This Means for Accountants and Employers
For finance professionals and employers, this shift will bring changes to pension governance, reporting, and engagement. Firms should:
Review existing pension scheme structures for compliance and future consolidation.
Stay informed on the Pension Schemes Bill and prepare for possible mandatory measures.
Advise clients on the long-term financial implications of these changes for employee pensions.
Disclaimer: This article is for general information purposes only and does not constitute financial or legal advice. Please consult a qualified adviser regarding your specific circumstances.