Rachel Reeves’ plans to reform Britain’s pensions industry

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Chancellor Rachel Reeves has proposed a major overhaul of the pensions industry as the government hopes to drive investment into productive British assets through a series of “megafunds”.

This would involve rapid consolidation across UK defined contribution workplace pensions — forecast to manage £800bn by 2030 — and local government pension schemes in England and Wales, which are on track to reach £500bn in size by the end of the decade. 

By forcing schemes to merge into funds with at least £25bn in assets, the government estimates it can unlock up to £80bn to invest in assets with higher returns — such as private equity and infrastructure — and deliver better performance for savers. 

How do the proposals affect defined contribution schemes?  

The government is preparing to set a minimum size of at least £25bn for the defined contribution workplace pension schemes that employees are automatically enrolled into, known as default funds.

It is also proposing to enable mergers without consent from members of contract-based schemes, which are run by large insurance companies and regulated by the Financial Conduct Authority. This approach was previously avoided because contract schemes do not have trustees to advise whether a merger is in members’ interests.

The proposals would result in a “much smaller” number of multiemployer schemes according to the government’s consultation documents, published on Thursday. There are currently about 30 authorised master trusts and 30 providers of contract-based schemes, with assets of around £130bn and £350bn respectively last year, according to the government and New Financial think-tank.

Contract-based schemes tend to have lower allocation in private markets such as private equity funds and infrastructure assets than master trusts, which fall under the remit of the pensions regulator.

“The proposals are genuinely radical and would, over the course of this parliament, reshape UK workplace pensions,” said Patrick Heath-Lay, chief executive of master trust provider People’s Partnership. “The result would be a sharp consolidation of pensions provision creating fewer, much larger providers.”

“It looks like the government are deadly serious about intervening in the DC market to create megafunds,” said Gregg McClymont, executive director at IFM and a former Labour MP.

What do the reforms mean for local government pension schemes? 

The government has proposed that 86 local councils across England and Wales hand over the management of all £392bn of their combined assets to one of eight pools — or so-called megafunds — by March 2026. 

This will accelerate an existing trend. Councils already invest some of their funds through these pools — by March this year about 45 per cent of local government pension assets were invested via pools’ sub-funds.

But the government has also set out rules for how the pools should operate — requiring them to be investment management companies authorised and regulated by the Financial Conduct Authority, with expertise and capacity to implement investment strategies. 

Local councils will have the choice whether or not they set an investment strategy, but they will be required to “fully delegate” the implementation of this to the pool, and to take their principal advice from the pool. 

“It’s great that the chancellor has backed our argument for fewer, bigger LGPS investors with the in-house expertise to inject equity into infrastructure and housing assets,” said Tracy Blackwell, chief investment officer of the Pensions Insurance Corporation. “A country that needs more infrastructure investment needs more natural equity sponsors for strategic infrastructure projects.”

Others are less impressed. Quentin Marshall, chair of the Kensington and Chelsea council pension fund committee, which has been the best performing LGPS fund over the past five years but has not pooled any of its assets, said: “I think they [the government] will create big bloated unaccountable quangos . . . which will deliver worse returns at a higher cost.”

Robbie McInroy, head of local government pensions consulting at Hymans Robertson, welcomed greater pooling but said March 2026 was an “overly ambitious” timescale as it could add unnecessary costs.

He added that transferring oversight of legacy illiquid assets from local councils to pools “seems like a huge amount of work for the pools and relatively inefficient compared to just letting them run-off within the funds”.