The UK is to progress with plans for the creation of “megafunds” for defined contribution (DC) pensions, a move expected to boost real assets investments. However, industry players believe that while the plan to mobilise capital for UK growth and net zero is clear, success depends on effective implementation, avoiding mandated investments and building trust in the domestic market’s ability to offer quality, scalable opportunities.
Following a consultation that closed early this year, the government is mandating a “transition pathway” that will enable DC workplace pensions and local government pension schemes (LGPS) to operate at scale, targeting at least £25bn (€29.8bn) in assets under management by 2030.
The government’s long-term vision for the UK’s DC pensions system is to create a competitive market of fewer, larger, well-run schemes with the capability and scale to invest for the longer term which can benefit savers and their communities.
It said “megafunds will be better placed to be the long-term, patient sources of capital that the UK is painfully short of,” adding that this will support UK companies, infrastructure projects and other private markets.
Alex Brierley, co-head of Octopus Energy Generation’s fund management team, said the final pension investment review “could mark a pivotal shift” in how UK pension capital is mobilised to fuel long-term growth and accelerate the path to net zero.
Brierley added: “Giving well-funded DB [defined benefit] schemes the flexibility to invest surplus assets more dynamically is a welcome move - especially if that capital is directed into UK infrastructure and clean energy projects that offer stable, long-term returns.
“But ambition must be matched by action. The UK has a real opportunity to become a global leader in green investment, but only if pension schemes are confident the domestic market can deliver the scale, certainty and regulatory consistency they need. Without that, capital will continue to flow elsewhere.
“Consolidation can help unlock efficiencies and scale, but unlocking billions in private capital depends on building trust in both the quality of investment opportunities and the strength of the regulatory environment. A clear, long-term policy roadmap and open collaboration between government, investors and regulators will be critical to turn this vision into reality. With the right approach pension capital could become one of the UK’s most powerful tools for delivering sustainable, inclusive growth.”
Ion Fletcher, director at the British Property Federation, said: “DC pension schemes are the future of pension money in the UK, but their potential to transform our towns and cities has been stymied by fragmentation and lack of scale. The government’s focus on supporting ‘megafunds’ will create pools of capital with the firepower and expertise needed to invest in major infrastructure projects benefitting the UK’s local and national economy, as well as individual pension pots.
“We have seen firsthand the impact of similar approaches in Australia and Canada, with huge investment into the commercial and living sectors and support any initiatives that enables capital to enhance our buildings, towns and cities.”
Paul Richards, chief executive at the Association of Real Estate Funds, said: “This is a welcome set of initiatives which, despite the report’s title, go beyond problems internal to the current pensions system to address other blockages to UK pension funds investing in productive assets in the UK.
“While addressing the need for scale in the pensions system and the need to move away from a cost focus towards a value-for-money approach, the proposals also make the important link with the with the need to grow and unlock the pipeline of investment opportunities, without which increased demand might merely increase prices.
“The link is made to reforms to the planning and regulatory system, boosting the availability of grid connections and other essential physical infrastructure, the provision of finance through the National Wealth Fund and the British Business Bank, and the involvement of Local Mayors. All in all, this a comprehensive set of policy initiatives which we welcome warmly.”
Concerns about mandated investments
Matt Tickle, CIO at Barnett Waddingham, said: ”The main concern for schemes following the government’s wide-ranging pension announcements is the looming threat of ‘mandation’.
“While the chancellor’s ‘backstop’ power - which could compel funds to back British assets - appears to have deterred that threat for now, any move towards mandated investment is a blunt tool, leaving members and society as a whole at risk of poorer outcomes.
“That said, the fact that there is time gives some of the government’s better policies, around planning reform, value for money and retirement pathways more space to succeed. If they do, they could generate opportunities that pension schemes will willingly invest in. Efforts to improve the flow of investable opportunities are certainly positive, however there is still an urgent need to focus on reforms rather than enforcing mandates.”
John Forbes, an independent consultant who specialises in the structuring of real estate funds and regulation, said the threat of compulsion for DC schemes to invest in illiquid assets if they do not do so voluntarily is unhelpful.
“There is a compelling investment case for investing in real estate and other illiquid assets. The suggestion of coercion, if this does not happen, creates an unfortunate suspicion that the trustee’s fiduciary duty is being overridden, regardless of what the government says. We hope that this is taken into consideration in the proposals in the Pension Schemes Bill,” he said.
Unleashing full power of UK’s pension pots
António Simões, group CEO, L&G, said: “Today’s announcements mark further important progress in unleashing the full power of the UK’s pensions pots. We share the government’s ambitions and believe these reforms are an opportunity to deliver stronger outcomes for DC and DB savers whilst helping to maximise investment in the UK economy.
“A crucial part of this puzzle that remains unresolved is how we will address pensions adequacy, so UK savers are set up for retirement. This is critical to both the financial resilience of individuals, and the UK’s long-term economic health, and will only be achieved by increasing savings levels. We have an important window of opportunity to act and urge the government to start this important work as soon as possible.”
The UK’s megafund proposal is an attempt to emulate the perceived success of the Australian and Canadian pension systems, particularly the Maple 8, in mobilising large-scale capital for investments.
Last summer, the UK Chancellor, Rachel Reeves, said “I want British schemes to learn lessons from the Canadian model,” having met with some of the funds that form the Canadian ‘Maple 8’, including Canada Pension Plan Investment Board, which alone has more than C$700bn (€616.2bn) in assets, and Ontario Municipal Employees’ Retirement System and Ontario Teachers’ Pension Plan.
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