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Britain's public sector pension funds are not large enough to generate good returns for British savers, Chancellor Rachel Reeves told the BBC.
His comments come as the government reveals plans to merge the UK's local government pension scheme, a group of funds which together manage £354 billion of investments, into a handful of “mega pension funds”.
The plans are part of what the government has called “the biggest pension reform in decades”.
He says it will boost investment in the UK, but critics say the measures “could put savers' money at risk”.
Reeves told the BBC ahead of her speech at Mansion House on Wednesday evening that she wanted the UK's pension systems to be more like those in Canada and Australia.
In these countries, the pensions of local officials, such as teachers and civil servants, are pooled into a handful of funds capable of making large investments around the world.
“They probably have the best pension funds in the world,” Reeves said.
The government plans to merge the 86 municipal pension funds – which represent 6.5 million pensions and are managed by local government officials – into “megafunds” managed by fund managers.
These larger funds would also be required to “specify a goal for the pool’s investment in their local economy.”
The government also wants to set a minimum size for defined contribution schemes, which manage around £800bn of investments, to encourage the consolidation of around 60 different multi-employer schemes.
The government says its changes could “unlock” £80 billion of investment in the UK in areas such as energy infrastructure, tech start-ups and public services.
“Our pension funds in Britain are too small to make investments that provide a good return for people saving for retirement and to help our economy grow,” Reeves said.
She added that it made “no sense” that Canadian teachers and Australian professors were more likely to invest in many long-term UK assets than UK savers.
Risk and reward
However, critics say the plans could put savers' money at risk.
“Conflating the government's aim of boosting investment in the UK with people's pension outcomes presents a danger as all the risks are taken with members' money,” said Tom Selby, director of public policy. at AJ Bell.
He said the current system encourages trustees to provide “the highest possible retirement income for members” rather than focusing on UK-wide economic growth.
This sometimes means investing in things like US stocks and avoiding UK investments which the government likes.
And while bigger funds can mean bigger rewards, they can also mean bigger risks, with Canada's pension fund, the Ontario Municipal Employees' Retirement System, being the largest investor in the region in difficulty of Thames Water.
Others say there is a risk that larger funds will struggle to find enough large UK projects 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 Quilting.
He added that if “too much money pursues too few viable investments,” funds could be forced into “riskier” investments.
Shadow chancellor Mel Stride said the Conservatives will “look closely at the details of what Rachel Reeves sets out – particularly around the requirement to determine where investments should be made”.
