Rachel Reeves will today unveil a major pensions shake-up designed to unlock up to £80 billion of investment in British infrastructure and business.
In her Mansion House speech tonight, the Chancellor will confirm she is pressing ahead with plans to merge pension schemes to create new ‘megafunds’ capable of investing in major infrastructure projects and emerging industries.
Ms Reeves will argue that the move could unlock a wave of private sector investment that will boost her anaemic growth forecasts and ultimately provide better returns for pensioners.
The Chancellor will use tonight’s speech in the City of London to try and set out a positive vision for growth, following last month’s high-tax Budget, which has rattled some employers.
Pledging to ‘go for growth’, she will say she has ‘never been more optimistic about our economic potential’.
In a thinly-veiled warning to Donald Trump, she will also make the case for free trade, arguing that protectionist tariffs of the sort planned by the president-elect would harm the global economy.
The source said evidence from countries like Canada and Australia suggested bigger schemes could deliver high returns by investing in projects like road and rail rather than tying up cash in government bonds.
New Treasury analysis to be published this week will show that big funds with assets of £25 to £50 billion could provide far more productive investment in a wider range of assets.
Ms Reeves will say: ‘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.’
In the biggest pension reform for decades, the existing 86 local authority pension schemes, which control assets worth almost £500 billion, will be required to consolidate their assets in a ‘handful of megafunds’.
Ministers will also legislate to create a minimum size for private sector defined benefit schemes, forcing the merger of some schemes, which between them manage almost £800 billion of assets.
The Treasury said the resulting megafunds would have to meet ‘rigorous standards to ensure they deliver for savers’.
Local authority schemes are also expected to have to invest at least 5 per cent of their assets in the local economy.
The plans, which were originally discussed by the last Conservative government, are now a key plank of Labour’s growth agenda, which took a knock last month when the Office for Budget Responsibility downgraded its forecasts for the later years of this decade following the Budget.
The proposals were welcomed by some in the pensions industry last night.
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association, said the plans were a ‘positive step towards ensuring our system delivers the best value for money for savers’.
She added: ‘Larger pension schemes can help achieve better outcomes for savers through economies of scale, stronger governance, negotiating power and additional resources.’
But the Chancellor is facing a backlash from some local authority schemes.
In a response to a government consultation is September, the Local Government Pension Scheme Advisory Board warned that some members wanted to maintain local accountability and were concerned that they could be forced to break their duty to provide best value for pensioners if they were required to follow government investment rules.
The body acknowledged the existing structure was ‘not ideal’ but added: ‘Forced merger or consolidation should be avoided at all costs, as it is highly unlikely to lead to better outcomes.’