The UK Government has announced proposals that could significantly reshape the pension landscape, with defined contribution schemes and public sector funds at the heart of the reform. The initiative, revealed through the Pension Schemes Bill, aims to double the number of “megafunds” — schemes managing over £25 billion — by the end of the decade.
This strategy is part of a broader government drive to stimulate economic growth through pension-based investment while maximising retirement income for workers. According to the Treasury, the consolidation of local government pension schemes and a new investment framework could yield annual savings of up to £1 billion.
Large-Scale Fund Pooling to Drive Pension Returns
A central element of the proposed reform involves consolidating the 86 administering authorities in the Local Government Pension Scheme (LGPS) into six larger investment pools. According to Deputy Prime Minister Angela Rayner, this restructuring aims to harness the “untapped potential” of the LGPS, which currently manages around £392 billion in assets.
Under the plan, multi-employer defined contribution (DC) pension schemes — such as master trusts — would also be encouraged to scale up into larger entities capable of managing greater volumes of assets.
According to the Treasury, this shift towards megafund-level schemes is expected to improve investment performance through economies of scale and more sophisticated portfolio strategies.
Chancellor Rachel Reeves stated that the reforms are designed to make “pensions work for Britain,” with the goal of not only increasing returns for savers but also boosting investment in areas such as clean energy and high-growth industries.
Economic Stimulus Through Pension-Driven Investment
The proposals also aim to stimulate the broader UK economy by unlocking up to £50 billion in investment capital over the next five years. This capital is expected to be channelled into domestic infrastructure projects, including transport, energy and digital connectivity.
According to former Pensions Minister Sir Steve Webb, now a partner at consultancy LCP, the announcement marks “a red letter day” for both savers and the wider economy. He noted that by freeing up surplus funds, pension schemes could play a more active role in national development while delivering better long-term outcomes for members.
The government argues that more productive use of pension assets can help balance fiscal policy while addressing long-standing challenges in retirement security. By encouraging scale, improving oversight and refining strategy, the reforms could reshape how pensions support both individual and national prosperity.
