Rachel Reeves is set to outline her plans next week to utilise the £354bn local government pension scheme to stimulate the UK economy. The announcement, which will take place at the Mansion House, aims to reassure the City of London that there is a solid strategy for driving economic growth.
Reeves, the Chancellor, is looking to accelerate the consolidation of various local authority pension funds — a scheme that, collectively, could be the seventh-largest in the world. Her vision is to see more of these funds directed towards domestic initiatives.
Treasury officials have indicated that Reeves will use her address on Thursday to respond to criticisms that her recent tax-increasing Budget did not adequately focus on growth or reform. One ally admitted, “Those messages didn’t really land.”
The core of Reeves' address at the annual business leaders' dinner will be pension reform. She has placed the review of the UK’s £2.4tn pension industry at the heart of the government’s economic growth plans, aiming to boost investment in British assets.
Key to this plan are reforms to the sprawling local government pension scheme, which has a fragmented administrative system that increases costs and limits the potential for investing in major UK infrastructure projects.
While Reeves has dismissed the idea of merging the 86 different local council funds in England and Wales into a single super fund, equivalent in scale to the Canada Pension Plan, she is keen to promote consolidation. Such a move could simplify administration and reduce costs.
Progress towards consolidation has been slow over the last decade, despite some efforts to streamline these funds. Roughly half of Local Government Pension Scheme (LGPS) assets are currently managed by eight separate pools, each exerting varying degrees of control.
This week, local government minister Jim McMahon hinted at Reeves’ approach, stating that the government could lower pension scheme running costs and unlock funding for infrastructure projects without creating a giant super fund. Instead, the aim is to build on reforms implemented since 2015.
Speaking at an event hosted by Room151 at the London Stock Exchange, McMahon mentioned that the government will consult on enhancing asset pooling, assess governance structures, and encourage local investments. Regional mayors will play an important role in developing investable projects.
Reeves’ strategy mirrors that of the new Lord Mayor of London and builds on Mansion House reforms introduced by her predecessor, Jeremy Hunt. Hunt’s measures were intended to persuade pension funds to invest more in UK assets, fostering economic growth while improving investor returns.
“I started the ball rolling with the Mansion House reforms and to her credit Rachel Reeves seems to want to go further,” Hunt told the Financial Times. Privately, Reeves’ allies admit that there is a cross-party approach to these reforms.
In August, Reeves travelled to Toronto to meet with heads of major pension schemes. Her goal was to explore the potential for replicating a “Canadian-style” model in the UK, where significant retirement funds invest in equities and infrastructure.
“I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment,” she said at the time.
Industry experts do not expect Reeves to introduce measures mandating pension funds to allocate a specific portion of their investments to UK assets such as infrastructure or equities. “I really don’t think they will do that — there would be a massive row,” said one senior executive.
While Reeves believes that investing more in UK assets could bring higher returns for pension savers, Treasury insiders have indicated that she would avoid threatening the removal of tax subsidies if UK investments do not increase.
A longstanding concern at the Treasury is that directing pension funds towards infrastructure might reduce demand for government bonds. Reeves' Budget also set out plans for an additional £28bn in annual borrowing.
The Treasury noted that Reeves remains "focused on growth", and emphasised that pension reforms are a crucial part of this. Her Mansion House speech, they said, will outline the next steps in unlocking private investment to support the government’s growth strategy.
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