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The local government pension scheme, a collection of funds in the UK that oversee £354bn ($488bn) in investments, will merge into a collection of larger “pension megafunds”. This initiative forms part of the UK government’s major pension reforms, which it cites as being some of the most significant changes of recent decades. The government claims that this will strengthen the UK’s investment market, but the critics of these proposals state that this could put savers’ money at serious risk.
Reeves, the chancellor, stated during an interview with the BBC that public sector pension funds in the UK are too inadequate to provide decent returns to UK savers. Reeves wishes for the UK’s pension schemes to operate in a manner akin to those in Canada and Australia whereby local government workers’ pensions are pooled together and injected into a small group of funds. These funds are then free to invest ample funds in projects globally.
If the UK’s 86 council pension funds are amalgamated into larger funds run by fund managers, this could expand investment into the UK beyond its current rate. These larger funds will be obligated to provide a “pool’s investment target in their local economy”. To stimulate the consolidation of the approximately sixty separate multi-employer defined contribution schemes managing around £800bn of investments, the government plans to implement a minimum size limit. Furthermore, the government estimates that its reforms can possibly “unlock” £80bn in investment for items such as energy infrastructure, public services and tech start-ups.
Critics of these proposals have warned that these plans may impede savers’ funds. Tom Selby, the director of public policy at AJ Bell investment platform, stated that linking the government’s aspiration to encourage investment in the UK with people’s retirement prospects may increase the possibility of damaging the funds of plan members. Selby notes that trustees’ primary purpose is to secure the “highest possible income in retirement for members”, rather than prioritising UK-wide economic expansion. Consequently, funds will often choose to invest in products like US stocks instead of UK investment, which is the government’s preference.
Undoubtedly, larger funds could potentially mean larger returns. However, larger rewards can also present more significant risks. An example involves the Ontario Municipal Employees Retirement System, the largest investor in Thames Water, the troubled Canadian Pension Fund. Some experts attest that larger funds may encounter problems finding large UK projects left to invest in, with Jon Greer, the head of retirement policy at wealth manager Quilter, stating that “substantial, reliable projects are necessary to generate returns, but the market may struggle to offer enough of these opportunities, especially in the infrastructure sector”. Greer also posited that “if too much money chases too few viable investments,” then funds may be pressed into “riskier” investments.
The Shadow Chancellor, Mel Stride, informed the BBC that the Conservatives would be “looking closely at the detail of what Rachel Reeves sets out – particularly regarding the mandating of where investments are to be made.”
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