Pension 'megafunds' explained and what it means for your retirement savings

Rachel Reeves has revealed plans to create “megafunds” in a major shake-up that will affect your savings.

The reforms would consolidate almost 90 smaller local authority and private workplace schemes together, in the hope that larger funds could generate greater returns. In as Chancellor, Ms Reeves said the move would create £80billion to invest for businesses and infrastructure.

There are similar schemes that run in and Canada. The Government will hold a consultation on the reforms, which will then be introduced in a new Pension Schemes Bill next year. The Chancellor said: “Australian pension schemes invest around three times more in infrastructure investment compared to defined contribution schemes in the UK and 10 times more in private equity – including in high-growth businesses – compared to the UK. One of the key reasons for this is the much larger size of their funds.

“While our pensions landscape remains highly fragmented, that means many of our pension funds do not have the capacity to invest at the scale required. And more often than not, it is Canadian teachers and Australian professors reaping the rewards of investing in British productive assets through their pension schemes, rather than British savers. That’s not good enough, and we need to change that.”

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What would it mean for my pension savings?

The proposals would impact those who are signed up to a defined contribution (DC) pension scheme. This is the most common type of workplace pension scheme. It sees savers pay into a pension scheme with regular contributions and the size of your pot depends on how much you've saved - and the growth of your investment - by the time of you retire.

There would be a minimum amount these funds can have in them, currently expected to be between £25billion and £50billion. The Government is also consulting on allowing fund managers - who manage where your cash is invested - to move savers from schemes which are under-performing.

Those who are part of a defined benefit (DB) pension scheme would not be affected. This is a different type of workplace pension scheme that guarantees an income for life after retirement, based on your salary history and years of service.

Tom Selby, director of public policy at AJ Bell, said the proposals have the potential to be successful - but warned that caution will need to be taken so retirement savers are still getting the best returns. He said: “The government’s hope will be that by moving from having 86 local government schemes down to a single one, or a few, will benefit from economies of scale.

“My overarching concern is that the needs of the saver, whose money is ultimately going to be risked, will be forgotten about. There’s a reason that an occupational scheme has a trustee to look after the interests of members. Part of that is investing their money to maximise returns and get the best retirement outcomes possible.

“Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money. If it goes well, everyone can celebrate. But it’s clearly possible that it will go the other way, so there needs to be some caution in this push to use other people’s money to drive economic growth.“

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