Bigger Isn’t Always Better: Are Britain’s Pension ‘Megafunds’ a Dangerous Bet?

Chancellor Rachel Reeves has unveiled an ambitious plan to supercharge the UK economy by reforming the pensions market, aiming to unleash tens of billions of pounds in investments for British businesses and infrastructure.

In her first Mansion House speech as Chancellor, Reeves introduced the concept of “megafunds"—pension giants that could reshape retirement savings and fuel economic growth. Yet behind these promises, this venture may be treading a dangerous path.

A Bold Vision—Or a Risky Bet That Could Backfire?

Under the new Pension Schemes Bill set for next year, defined contribution (DC) schemes would consolidate, pooling assets from 86 local government pension authorities into colossal "megafunds.” These funds would target investments in UK infrastructure and industry, with hopes to inject up to £80 billion into the economy. But questions linger: could the costs of this ambitious reform outweigh the benefits for retirees?

While the government aims to revitalize the UK economy, international precedents offer a cautionary tale. In Canada, for example, only 7% of pension fund infrastructure investments remain within its borders, raising questions about whether Britain has the capacity to absorb such vast sums without these investments ultimately heading abroad. If so, the pledge to fuel “national growth” could ring hollow.

Bigger Isn’t Always Better: Are Megafunds Truly in Savers’ Best Interests?

The government claims that larger funds will leverage economies of scale to deliver better returns for future retirees, modeling after pension giants in Canada and Australia. Yet Sir Steve Webb, former pensions minister, warns against assuming that “bigger is always better.”

As a consultant at LCP, Webb points out that smaller pension funds, though less flashy, often achieve strong returns backed by employer contributions. “It would be devastating to lose these funds to an arbitrary size mandate,” he argues. Plus, if every fund is forced into a “megafund,” it could stifle investment diversity, limiting options for retirees and putting all assets into fewer baskets.

• Potential downsides of megafunds: While economies of scale might offer some cost benefits, they could also lead to a lack of investment variety, heightened competition among funds, and risks associated with large-scale funds overshadowing smaller, more effective ones.

An Old Idea Rebranded

Pooling pension funds is not a new idea in the UK. Sir Steve Webb recalls that plans to merge local government pension funds surfaced nearly a decade ago. But despite years of deliberation, these funds have yet to grow large enough to qualify as true “megafunds.” For Webb, the latest proposal looks more like slow progress than genuine reform.

Without a substantial shift in approach, the concept of megafunds may remain an unfulfilled vision, leaving retirees in a state of prolonged uncertainty. Moreover, this reform isn’t just a potential shake-up for retirees; it has already drawn concern from UK businesses. Companies, already grappling with rising costs, are warning of further strain.

Starting in April, a £26 billion hike in employer contributions to national insurance will tighten corporate budgets, threatening job growth and pay raises. Changes to agricultural inheritance tax relief are compounding the pressure, sparking anxiety in an already burdened sector.