Will pension megafunds power economic growth?

Adam Gates, Partner and Head of Insurance outlines the proposed consolidation within the UK pensions sector that could boost investment in productive assets and achieve higher returns.

Bigger is better. That’s the credo behind the most significant pensions reforms in decades. The Government believes that consolidation of pension funds, both those serving local government and the private sector, could unlock around £80 billion of investment for infrastructure projects and businesses of the future.

The advantages of pension megafunds can be seen in less fragmented markets like Canada and Australia. For example, Canada’s pension schemes invest around four times more in infrastructure than those in the UK.

Lack of scale has historically put a brake on major infrastructure investment. Analysis from the Government’s Pensions Investment Review finds that once pension funds are managing assets of between £25-50 billion they are in a better position to invest in a wider range of productive assets, such as exciting new businesses, private equity-backed ventures and expensive infrastructure projects.  

Pensions reform was at the heart of Chancellor Rachel Reeves’ first Mansion House speech, delivered in November. It’s projected that by the end of the decade, the Local Government Pension Scheme will be managing assets worth £500 billion. Currently, there are 86 Local Government Pension Scheme administering authorities, some of which might be described as minnows given that they manage assets of below £500 million. The Chancellor announced plans for legislative cull that will consolidate these local authority assets into eight mega pools.

This is happening within the context of major change to the local government landscape. As my colleague Jes Ladva noted in a recent piece, the Devolution White Paper published on 16 December 2024 promises significant reorganisation of local government that will impact every council and community in England.

The Chancellor also wants to shake up the private sector defined contribution (DC) pensions space. Consolidation is again the key. Today, there are roughly 60 different multi-workplace schemes (that by 2030 would be managing £800 billion of assets). The aim is to legislate for a minimum size and maximum number of DC pension scheme default funds. Again, these bigger funds should be better placed to invest in productive assets and deliver higher returns. There are also plans for legislative changes that will make it easier for fund managers to move savers away from underperforming schemes.

At Odgers, we have worked with clients such as Nest Pensions and People’s Partnership, which manages over £30 billion in assets. Clearly, considering the level of reform on the horizon, it’s an exciting time for the industry. There are opportunities for organisations and individuals alike.

A lot rides on getting reform right. Greater investment in infrastructure and dynamic businesses is good for the economy and society more broadly. Additionally, it’s vital that pension funds deliver good returns for savers.

According to the World Economic Forum’s (WEF) Global Risks Report 2025, over the next decade the pension crisis “will start to bite” in super-ageing societies – those countries where more than 20% of the population is over 65 years old.