Chancellor Rachel Reeves has unveiled ambitious pension reform aimed at fuelling UK growth through £25bn investment megafunds. Plan aims to boost pension returns, local growth and long-term investment across the UK economy
Chancellor Rachel Reeves has unveiled the government’s blueprint for a radical overhaul of the UK’s pension investment system, including the creation of massive £25bn “megafunds” intended to drive higher returns for savers and inject billions into British infrastructure, clean energy, and fast-growth businesses.
The plan, which builds on international models such as Canada and Australia’s pension superfunds, is part of the government’s broader economic strategy to spur domestic investment and revitalise productivity. Reeves said the reform package would deliver both stronger retirement outcomes and long-term economic benefits, BBC reported.
“These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses,” Reeves said in a statement.
The initiative has already won backing from 17 of the country’s largest pension providers, who earlier this month voluntarily signed up to the so-called Mansion House Accord, committing to allocate 10% of their assets to unlisted investments and at least 5% to UK-based assets. However, the government is also preparing to legislate should the industry fail to make sufficient progress by the end of the decade.
The reforms are detailed in the final report of the government’s Pensions Investment Review, published on Thursday. The report concludes that stronger consolidation and clearer investment mandates will not only drive higher returns, but also create economies of scale and reduce inefficiencies in the system.
According to Treasury estimates, a typical pension saver on average earnings could see their defined contribution pension pot boosted by as much as £6,000 as a result of the reforms. Overall, the package is expected to mobilise more than £50bn in additional capital to flow into UK homes, businesses and public infrastructure.
The new framework will be enshrined in the forthcoming Pension Schemes Bill, which is set to be introduced in Parliament in the coming weeks.
One of the most transformative elements of the plan involves merging the 86 local government pension schemes – which collectively manage £392bn for more than six million workers, most of whom are lower-paid women – into just six large asset pools by March 2025. These defined benefit schemes will, for the first time, also be subject to local investment targets, ensuring a portion of their capital is directed into regional and national priorities.
Defined contribution pension schemes, which depend on market performance rather than fixed retirement payouts, will also undergo significant restructuring. The government aims to increase the number of schemes managing assets worth £25bn or more to at least 20 by 2030 – up from only 10 today.
According to BBC, industry experts have cautiously welcomed the reforms, though some have raised concerns about the possibility of government intervention in investment decisions. Zoe Alexander, director at the Pensions and Lifetime Savings Association, acknowledged the far-reaching consequences of the plan.
“Increased consolidation has the potential to improve retirement outcomes through improved governance, wider investment diversification and improved bargaining power,” BBC quoted Alexander as saying. However, she also noted that the shift would carry “significant implications” for how pension schemes operate, particularly if legislative powers are used to mandate investment strategies. The government has insisted it does not expect to invoke its legislative backstop but has included it as a safeguard in case voluntary efforts fall short.
The broader aim is to replicate the success of international pension giants like Australia’s Future Fund or Canada’s CPPIB, which have become major players in global investment markets through scale, strategic asset allocation and a long-term investment horizon.
Critics within the industry remain wary of political interference in investment mandates, especially if schemes are required to prioritise domestic projects over global returns. But Treasury officials argue that the current system – with hundreds of small schemes managing assets inefficiently – is failing savers and the economy alike. The reform package is also closely linked to the government’s wider ambitions to foster growth, green investment and infrastructure development through domestic capital. Reeves has repeatedly stressed that pension reform is essential not just for savers, but for the country’s future prosperity.
“We want the money that millions of British workers save for retirement to be working harder – both for them and for Britain,” Reeves said.
