What will Rachel Reeves’s retirement scheme changes mean for pensions? – The Guardian

What does Reeves have planned?

Next year, the Chancellor will launch a new pension scheme which aims to pool the assets of England and Wales' 86 Local Authority Pension Schemes (LGPS) into eight “mega funds” worth an average of £50bn each by 2030. I plan to submit a bill.

Mr Reeves also plans to consolidate smaller defined contribution schemes from private companies across the UK into a pool of between £25bn and £50bn.

There have long been questions about how to deal with Britain's fragmented pension landscape, including LGPS assets. LGPS is one of the world's largest defined benefit schemes, with 6.5 million members and assets of £360 billion.

What do these “mega funds” mean?

The government aims to emulate pension success stories in countries such as Australia, Canada and Norway, where public sector pension schemes are consolidated into large funds managed in-house by professional investors. .

The idea is that larger retirement funds can invest large sums of money in a wider range of riskier, long-term assets, such as infrastructure, start-up companies, and direct shares in private companies, known as private equity. be. The government is not dictating where the pooled severance pay will go, but it is expected that the bulk will flow naturally into Britain's own growing businesses and infrastructure projects.

Pooling assets would reduce costs and reduce annual fees paid to teams of lawyers, banks, advisors, asset managers and actuaries who support individual funds.

Many point to a success story in Canada, where a small number of plans known as Maple 8 have combined taxpayer-supported pension plans for teachers, municipal workers, health-care workers, etc. It manages $2 trillion (approximately 1.1 trillion yen). Maple 8 was created following a series of reforms aimed at tackling funding shortages in the 1990s and is well known for investing in infrastructure projects around the world, including in the UK.

What do these overseas “mega funds” invest in?

Foreign “mega funds” such as the Ontario Teachers' Pension Plan and the British Columbia Investment Management Corporation invest in parts of the UK's gas network, while others invest in parts of the UK's ports, offices, shopping centers and other cities. We have acquired shares in public utilities.

Overnight, news broke that PSP Investments, which manages retirement funds for the Canadian Armed Forces and the Royal Canadian Mounted Police, had acquired the operator of Aberdeen, Glasgow and Southampton airports from Ferrovial and Macquarie in a £1.5 billion deal.

Most Canadian funds achieve higher average annual returns. According to the numbers, over the past 10 years, Maple 8 has secured returns of 7.3% to 9.3%, compared to 7% for LGPS. It was compiled by consulting firm Hymans Robertson.

Part of that is due to the fact that Canadian companies have acquired more private equity stakes, outpacing other types of investments such as government bonds and publicly traded stocks over that period.

But critics say such investments also come with risks. Earlier this year, the Ontario Municipal Employees' Retirement System, known as OMERS, was forced to write down the value of its 31.7 per cent stake in the parent company of troubled electricity company Thames Water to zero.

I have a feeling of deja vu. Is this plan new?

No, Mr. Reeves hinted at the plan when he met with pension officials in Toronto this summer, but he is effectively rehashing similar plans from past governments.

One of the most serious attempts took place about 10 years ago, in 2015. Then Prime Minister David Cameron pushed local government pension scheme funds into larger pools with the aim of reducing investment costs and enabling collective investment in assets such as infrastructure. .

However, Prime Minister Cameron's changes fail to set a deadline for consolidation, and so far only around 39% of LGPS assets will be pooled into a larger fund, with the process forcing individual plans to further It was criticized for adding cost.

The last Conservative chancellor, Jeremy Hunt, sought to revive these plans last autumn, saying he would invest all of local authority pension funds' assets in entities worth more than £200bn by 2040, so many I guessed that he wanted to subdivide the groupings. There are two or three pools. Those plans were scrapped in the run-up to this year's general election.

What challenges might Reeves face?

Mr Reeves could face bureaucratic battles with local councilors, including those from his own party, who don't want to give up control of how pensions are invested.

Pensions and Lifetime Savings Associations have warned of potential tax and legal costs when transferring assets into a larger pool, with the issue hampering the consolidation process started under Cameron's government. Ta.

There could also be a backlash from lawyers, asset managers, banks and actuaries who stand to lose hundreds of millions of pounds in annual fees and contracts if the funds are combined.

And proponents of a more disaggregated model argue that it will affect the diversity of investments made by UK funds.