Reeves’ ‘Megafund’ Gamble: Industry Warns Against Government Dictating Investments

In a bold move that has raised eyebrows across the financial sector, the UK government is forging ahead with sweeping pension reforms designed to create a series of £25bn “megafunds” – a strategy critics fear could open the door to unprecedented state influence over private investment decisions.

Chancellor Rachel Reeves insists the reforms will deliver stronger returns for workers and unlock billions in funding for clean energy, infrastructure and high-growth British businesses.

“These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses,” Reeves said.

But the plan has prompted growing concern over the prospect of centralised control. While 17 of the UK's largest pension firms signed a voluntary agreement to support the reforms earlier this month, the Treasury has simultaneously included a legislative backstop in the forthcoming Pension Schemes Bill—giving ministers the power to enforce compliance if the industry doesn’t move fast enough.

The government claims it doesn't expect to use the new powers. Even so, many industry figures remain wary.

Chris Rule, Chief Executive of the Local Pensions Partnership, warned that government pressure might miss the real issue. “The challenge for investment into the UK has been finding good investments to make – and policy that may improve that supply side [is] probably just as important,” he said. He noted that most funds already “invest in the UK and locally anyway”.

Under the reforms, both defined benefit and defined contribution pensions will undergo major consolidation. The country’s 86 local authority pension schemes—managing £392bn in retirement savings for over six million public sector workers—will be merged into just six asset pools by March 2025, with for the first time local investment targets imposed.

Defined contribution schemes, which are valued at around £800bn, will also be consolidated, with the aim of creating more than 20 “megafunds” worth £25bn+ each by 2030—double the current number.

Zoe Alexander, Director at the Pensions and Lifetime Savings Association, said the shift would have “significant implications” for how schemes operate, although she acknowledged it could boost outcomes: “Increased consolidation has the potential to improve retirement outcomes through improved governance, wider investment diversification and improved bargaining power.”

Others, however, warn against the risks of government overreach. The reforms effectively encourage pension funds to redirect a portion of their capital into politically aligned domestic projects, with 10% of assets to be invested in unlisted equities and 5% explicitly in UK-based assets. Critics argue that this raises uncomfortable questions about how future governments might direct or influence the financial decisions of independent schemes.

Miles Celic, Chief Executive of The City UK, backed the Chancellor’s ambition, saying the strategy could “help drive economic growth”. But even supporters are watching carefully to see how the policy unfolds.

Former pensions minister Sir Steve Webb called the announcement “truly a red letter day for pension schemes, their members and the companies who stand behind them”, adding: “The government has clearly been bold in this area and this opens up the potential for this surplus money to be used more productively to benefit scheme members, firms and the wider economy.”

The government claims the changes could unlock £50bn in new UK investments and boost the average defined contribution pension pot by £6,000—thanks to economies of scale and improved investment efficiency.

Yet for some, the bigger question remains: just how far should the government go in steering the private pensions market? The final report from the Pensions Investment Review, published today, may bring clarity—or stoke further controversy.

Source: BBC News