As an organisation dedicated to empowering institutional investors and businesses to value people and planet alongside profit, Pensions for Purpose welcomes this bold vision for consolidating assets to drive sustainable economic growth.

Key reforms and their implications

The proposed creation of ‘megafunds’ involves two major consolidations: bringing together multiple DC master trusts, which collectively manage billions in workplace pensions and consolidating local government pension schemes (LGPS). Together, these forms could unlock approximately £80bn for investment in private equity, infrastructure and growth businesses. The Labour pension review's two-phase approach – focusing first on investment and then on retirement adequacy - provides a comprehensive framework for reform. This aligns with our long-held position that pension capital can be both sustainable and better deployed to generate strong returns for beneficiaries. 

 The consolidation of 86 LGPS administering authorities into eight pools mirrors successful international models seen in Australia and Canada. This restructuring could serve as a template for wider institutional consolidation, enabling more sophisticated investment strategies across the investment ecosystem. The Australian example demonstrates the potential – their pension schemes invest around three times more in infrastructure and 10 times more in private equity compared to UK schemes.

 Opportunities and considerations

While we support this direction of travel, several considerations must be addressed:

1. Fiduciary duty: the consideration of both financial and non-financial factors that can influence long-term investment performance is a requirement of modern fiduciary duty. This includes systemic risks like climate change and social inequality. The megafunds must embrace this contemporary understanding of fiduciary responsibility, while clear guidance from The Pensions Regulator is needed to empower trustees in addressing systemic risks like climate change and social inequality

2. Impact measurement: as larger pools of capital are directed toward productive assets, robust frameworks for measuring financial returns and broader societal impact will be important. 

3. Governance structures: the new megafunds will require sophisticated governance frameworks to ensure well grounded decision making and risk management. 

4. System change: the consultation process must address underlying systemic barriers, including legal frameworks, accounting standards and board governance structures that impede the integration of people and planet alongside profit, as well as viewing fiduciary duty differently, as outlined in point one.

Next steps

We look forward to engaging with our members, the Treasury, DWP and wider industry stakeholders as these reforms progress. The publication of the pension scheme bill next year will be a milestone in implementing these changes.

The focus on unlocking pension capital for productive investment aligns with our mission to foster positive impact through pension fund investments. We encourage our members to actively participate in the consultation processes shaping these reforms.

As the Chancellor noted, this represents the most pro-growth financial services package since the financial crisis. The pension industry has an outsized part in supporting sustainable economic development while delivering strong returns for beneficiaries. These changes could provide the framework needed to achieve both objectives.

Call to action

Building on our CEO's evidence to the Work and Pensions Select Committee in February 2024 and in light of the recent Mansion House speech, we call for four critical changes to enable effective implementation:

1. Update the Companies Act through the Better Business Act to align corporate responsibilities with the long-term sustainability goals these measures aim to achieve.
2. Clear guidance from The Pensions Regulator on fiduciary duty interpretation, empowering trustees to incorporate systemic risks into their investment decisions.
3. Independent review and regulation of investment consultants by the Financial Conduct Authority to ensure alignment between advisers and the sustainable investment objectives of these initiatives.
4. Develop place-based impact investment frameworks that enable the new pension pools to support regional development, maximising the local economic benefits of this consolidation. 

These systemic changes are essential to realise the full potential of the Mansion House reforms and create a financial system that truly serves  people and planet alongside profit.