Rachel Reeves met with Canada's top pension bosses, hinting at potential UK pension reforms
Chancellor Rachel Reeves met with the heads of Canada’s major retirement schemes in Toronto on Wednesday, as reported by The Guardian.
This meeting has sparked speculation that Labour might adopt the Canadian public pension model in the UK. What would this entail, and could it work?
Canadian public sector pension schemes, like those in Norway and Australia, have consolidated into larger funds managed in-house by professional investors. These pooled funds allow for investments in a broader range of riskier, long-term assets such as infrastructure, startups, and private equity.
Canada's top schemes, known as the Maple 8, collectively manage around $2tn of taxpayer-backed pension funds for teachers, municipal employees, and healthcare workers.
In contrast, the UK's local government pension scheme (LGPS) focuses on one large defined-benefit scheme with 6.5 million members and £360bn in assets.
However, the LGPS is fragmented into 86 individually managed funds. For example, Orkney and the Isle of Wight had around £500m and £700m in assets, respectively, in 2022, while Greater Manchester had around £27bn.
Advocates of consolidation argue that a pooled LGPS fund could invest large sums in growing businesses and UK infrastructure projects. They also believe it would reduce inefficiencies, saving at least £1bn annually in fees paid to lawyers, banks, advisers, asset managers, and actuaries.
Over the past decade, various attempts have been made to create superfunds. In 2015, Prime Minister David Cameron encouraged local government pension scheme funds to pool together to cut investment costs and enable collective investment in assets like infrastructure.
However, there was no immediate deadline for individual schemes to shift assets into intermediate vehicles, which faced criticism for adding costs. According to the Pensions and Lifetime Savings Association, only £145bn or 39 percent of LGPS assets have been transferred to the eight current pools.
Last autumn, Conservative Chancellor Jeremy Hunt suggested further consolidation. By 2040, he proposed that all local government pension fund assets be invested in vehicles worth £200bn or more, leading to speculation about reducing groupings to two or three pools.
However, governments have not introduced laws to mandate these changes.
Political factors have primarily hindered consolidation. Responsibility for pensions is divided across government departments, including the Treasury, Department for Work and Pensions (DWP), and local authorities.
This division makes it difficult for ministers to make sweeping decisions without cooperation. Labour's appointment of Emma Reynolds as a cross-department parliamentary secretary at both the Treasury and DWP could potentially address this issue.
Governments have also avoided bureaucratic battles with local councillors, who do not want to lose control over pension investments.
“These are locally elected politicians making decisions that will impact local government. Councillors take their responsibilities very seriously and feel that they should have some say in things which are going to affect their services and their council tax,” says Toby Nangle, an independent analyst, and pensions expert.
Additionally, consolidation threatens the £1bn in annual fees earned by lawyers, asset managers, banks, and actuaries. Some proponents of a more fragmented model argue that it preserves the diversity of UK funds’ investments.
The Pensions and Lifetime Savings Association is open to working with the government on reforms but warns about potential tax and legal costs involved in transferring assets to larger pools or a superfund: “The transfer of assets should be undertaken in an efficient and effective way with a focus on avoiding loss of value.”
