Reuters
Chancellor Rachel Reeves wants pension schemes to 'revive the economy'
Plans for a major shake-up of pension funds have been announced by Chancellor Rachel Reeves.
It wants to create pension “megafunds” by merging the 86 municipal schemes in the United Kingdom, taking those in Canada and Australia as a model.
Other proposals suggest that pension plans reach a certain size or be consolidated. More funds could then be invested in UK infrastructure projects, the government says.
So will this affect people with pension savings?
Which pension funds are affected?
The Government says the Local Government Pension Scheme (LGPS) can get more out of investments – while tackling a £2 billion fees bill – by joining together.
There are 86 local government pension funds in England and Wales, which are mainly paid into by local civil servants.
These individually managed funds are divided by local authorities, making them more expensive as each fund pays its own management and administration fees.
Between them they have 6.5 million members and manage assets worth £354 billion.
These programs are all part of the LGPS, the seventh in the world, according to the British government.
Most of its participants are low-paid women.
According to Reeves' plans, the funds would be consolidated in one way or another, although at the moment it is not clear exactly how.
It may require them to pool their assets and resources, or merge among themselves to create a smaller number of larger funds, which would benefit from greater financial firepower and lower costs.
The LGPS is a defined benefit scheme, meaning that when it comes time to draw their pension, its savers receive an agreed amount based on their salary, regardless of the value of the fund at that time.
So dipping into the “megafunds” will make little or no difference to what they receive.
This is different from private pension funds, whose value rises and falls depending on investment performance.
Why copy Canada and Australia?
The “Maple 8” is a group of large Canadian pension funds, including the Ontario Teachers' Pension Plan, which manages assets worth C$247.5 billion ($141.8 billion). billion pounds sterling), and the Canada Pension Plan, whose assets are worth 409.6 billion Canadian dollars.
While UK pension schemes tend to invest more in assets like stocks and bonds, their Canadian rivals focus more on private markets.
The Ontario Teachers' Pension Plan, for example, holds only 7% of its assets in listed stocks, compared to 60% for traditional pension funds.
Instead, it is directing its investments toward private markets, including infrastructure (including a 25% stake in British energy giant SSE), real estate and private equity deals.
This type of model is not without risk, however.
The Ontario Municipal Employees' Retirement System is the largest investor in the troubled Thames Water region, a fact that has been highlighted by those questioning Reeves' plans.
Why is it supposed to be bigger, better?
Individually, the UK's 86 local government pension schemes vary in size, from Greater Manchester's massive £30bn fund to several schemes 'less than £1bn', according to Joanne Donnelly , Secretary to the Board of Trustees of the Local Government Pension Scheme Advisory. Advice.
Running these programs costs money. Everyone has to pay administration, governance and management fees, which can add up – last year they increased by £28m.
Like her predecessor Jeremy Hunt, who also announced his intention to implement a Canada-wide model, the Chancellor believes that consolidation would save money.
This would in turn “deliver better returns for savers and unlock billions of pounds of investment”.
Does everyone agree with the idea?
Tracy Blackwell, chief executive of Pension Insurance Corporation, told the BBC: “I think by having the right scale and expertise in-house to invest in a wide range of assets, they will be able to 'invest in more than they can. invest now. »
However, some say megafunds would not invest as much in smaller projects, while others say the changes could lead to retirement risks for savers.
“Conflating the government's aim of boosting investment in the UK with citizens' pension outcomes presents a danger as all the risks are taken with members' money,” said Tom Selby of the investment platform AJ Bell.
He said the current system encourages trustees to deliver the best outcomes for members rather than focusing on UK-wide economic growth, which could involve investing outside the UK.
Others question whether there are enough large projects in the UK to invest in.
“Large funds need substantial, reliable projects to generate returns, but the market may struggle to provide enough of these opportunities, particularly in the infrastructure sector,” said Jon Greer, head of retirement policy at wealth manager Quilter.
