The UK Chancellor, Rachel Reeves, eyes the pension model of Canada as a means to revamp the country’s local government pension scheme. This move will consolidate the smaller pension funds into one large and more efficient fund, hence driving more significant investments into infrastructure and businesses.

Rachel Reeves’ Plan to Overhaul UK Pensions: Turns to Canada for Strategy

UK Chancellor Rachel Reeves recently met with the chiefs of some of Canada’s largest retirement schemes in Toronto. Now, there are concerns that Labour may be about to drag the UK pension model toward Canada’s. But what does that mean, and is it a potential solution?

What Makes Canada’s Pension Model Different?

In Canada, public sector pension schemes have been consolidated into bigger funds. It is professionally managed by professional investors. Such large pension funds, as a result of this, can invest in different classes of assets such as infrastructure, startups, and private equity, which are considered to be more risky but may yield better returns in the long run.

The larger pension schemes in Canada—the “Maple 8″—look after around $2 trillion (£1.1 trillion) in pension funds for teachers, municipal workers, and healthcare employees. These are run effectively to provide high returns over the long term.

Today’s UK Pension Scheme

Within the UK, the LGPS is one of the largest pension schemes in the world, including 6.5 million members and £360 billion of assets, but is split into 86 different funds run as separate entities. Some of these funds have only around £500 million or £700 million of assets, such as those for Orkney or the Isle of Wight, while bigger funds like Greater Manchester have about £27 billion.

Why Consider Consolidation?

Supporters of consolidating LGPS believe that if these funds were pooled in a single large pool, more substantial investments could be made in businesses and infrastructure projects within the UK. They also feel that this can reduce inefficiencies, with savings of at least £1 billion in fees paid to lawyers, banks, advisers, asset managers, and actuaries on an annual basis.

Previous Efforts and Challenges

The idea of establishing larger, more efficient pension funds is not new. As far back as 2015, the then-Prime Minister, David Cameron, urged local government pension schemes to pool into larger pools to trim investment costs and invest collectively in assets like infrastructure. Actually, the process was rather slow, with only £145 billion—about 39% of LGPS assets—moved to the existing pools.

Last autumn, the then Conservative Chancellor, Jeremy Hunt, hinted at further consolidation. He stated that by 2040, all local government pension fund assets should be in vehicles worth £200 billion or more. To date, no legislation has been brought forward to underpin this.

Why Hasn’t Full Consolidation Happened Yet?

One major reason is politics. Responsibilities for pension schemes are divided among various government departments, with the Treasury, DWP, and local authorities in charge. This division makes it very hard to make sweeping decisions without cooperation.

There is often resistance to giving up control over how pension funds are invested from locally elected councillors, who are voted in to make decisions affecting local governments. Toby Nangle, an independent pensions expert, says that councillors feel there is a strong mandate to make decisions that will have an impact on their services and council tax.

Also, many lawyers, asset managers, banks, and actuaries profit immensely from the status quo. Consolidation could strip out £1 billion of annual fees, another reason to resist change.

Possible Advantages and Concerns

In the face of these challenges, supporters of a more consolidated pension model argue that this could lead to greater diversity in investment and more effectiveness in their administration. While the Pensions and Lifetime Savings Association indicated some willingness to debate reform with the government, it warned that transferring assets to larger pools may involve any number of tax and legal complications.

The Way Ahead

Clearly, for such consolidation to take place, several different government departments would have to act in harmony. There could be some bureaucratic hurdles overcome by appointing Emma Reynolds as a parliamentary secretary to both the Treasury and the DWP.

While there are difficulties in importing the Canadian model of pension style into the UK, certain advantages could be realized in terms of lower fees and larger, more impactful investments. Any such plan would call for careful planning and political cooperation, but it would also need to appease concerned local authorities and other stakeholders.