UK plans pension ‘megafunds’ to boost investment

THE UK government on Thursday said it wants many pension schemes to merge into "megafunds" with at least 25 billion pounds of assets by 2030 as part of efforts to channel more investment into the economy.

It also confirmed plans for a "backstop" power to potentially force investment firms to meet specific allocation targets for illiquid assets, such as domestic infrastructure projects.

The government said it does not expect to use this power, but some investment firms have criticised the move, saying it could lead to worse outcomes for pension savers.

The planned reforms will require pension schemes used by around 20 million Britons to merge if they are not already large enough. The aim is to follow the Australian and Canadian models, which have fewer, larger funds that can invest at scale.

"Basically everybody agrees bigger is better. That's not true for everything in life, but it is true for pension funds. We are just putting some wind into the sails of that existing process," pensions minister Torsten Bell told reporters.

The government has been pursuing a range of policies to boost domestic investment, including an agreement with 17 investment firms to invest 50 billion pounds of additional cash in UK businesses and infrastructure.

The targets could become mandatory if the government exercises its new powers.

"The government says it will create a 'sword of Damocles' power in legislation.... This essentially puts a gun to schemes' heads and will create those mandatory targets in all-but-name," said Tom Selby, director of public policy at investment platform AJ Bell.

Pensions minister Bell said the government was not directing specific investment strategies and that the proposals reflected a consensus within the pensions industry.

The Financial Conduct Authority said separately on Thursday it planned to request data from firms early next year on their asset allocations as part of the government's pension investment review.

The new changes will apply to multi-employer defined contribution schemes and local government pension schemes, the government said.

Penalties will be applied to pension funds that do not meet the 25 billion-pound assets threshold by 2030, such as losing access to auto-enrolment contributions that would be diverted into larger schemes, a government official told Reuters.

Schemes worth over 10 billion pounds that are unable to reach the minimum size by 2030 will be allowed to continue as long as they show a clear plan by 2035, the government added.

Some firms are concerned the plan could reduce competition.

"Supporting UK growth is a worthwhile goal, but fiduciary duty must remain at the heart of any reform," said Martin Willis, partner at consultancy Barnett Waddingham.

Local government pension schemes will also be given investment targets and told to combine assets that are currently split across more than 86 authorities into just six pools.

(With inputs from Reuters)