Chancellor Rachel Reeves will outline plans for pension ‘megafunds’ this evening at her Mansion House speech as she seeks to increase investment in the UK.

Her aim is to bring together local government pension schemes to ‘unlock’ £80bn of investment in infrastructure and other businesses.

The idea has been used successfully in Canada and has fuelled investment in Canada and the UK.

UK wealth manager and platform 7IM was recently acquired by the Ontario Teachers' Pension Plan Board, a global investor with approximately £145bn in net assets.

The Treasury says the ‘mega pensions’ initiative is the biggest pension reform in decades and will merge Local Government Pension Scheme assets and consolidate defined contribution schemes into so-called megafunds.

Ms Reeves is hoping the change will free £80 billion of investment for infrastructure projects and business investment but some experts have already raised concerned that pension trustees will lose control of funds and some investments may not be suitable.

Ms Reeves will tell the Mansion House tonight that the local Government Pension Scheme changes will free money for local public services in the long-term and secure more than £20 billion for investment in local communities. Ms Reeves says the current pension landscape is “fragmented” and is not helping to drive economic growth.

The reforms will be introduced through a new Pension Schemes Bill next year which will create megafunds by consolidating defined contribution schemes and pooling assets from the 86 separate Local Government Pension Scheme authorities. Ms Reeves says similar megafunds set-up in Australia and Canada use their size to invest in assets that have higher growth potential.

Ms Reeves said: “Last month’s Budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we’re going for growth.   

“That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britain better off.

Pensions Minister Emma Reynolds said: “Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy. These reforms could unlock £80 billion of investment into exciting new businesses and critical infrastructure.”

The Treasury says the UK pension system is one of the largest in the world with the Local Government Pension Scheme and Defined Contribution market set to manage £1.3 trillion in assets by the end of the decade.

Government’s analysis, published this week in the interim report of the Pensions Investment Review at Mansion House, shows that pension funds begin to return much greater productive investment levels once the size of assets they manage reaches between £25bn-£50bn.

According to the government Canada’s pension schemes invest around four times more in infrastructure, while Australia pension schemes invest around three times more in infrastructure and 10 times more in private equity compared to Defined Contribution schemes in the UK. 

The Local Government Pension Scheme in England and Wales will manage assets worth around £500 billion by 2030. These assets are currently split across 86 different administering authorities, managing assets between £300 million and £30 billion, with local government officials and councillors managing each fund, the Treasury says. 

Consolidating the assets into a handful of megafunds run by professional fund managers will allow them to invest more in assets like infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants – most of whom are low-paid women - whose savings are managed.  

The megafunds will need to meet rigorous standards to ensure they deliver for savers, such as needing to be authorised by the Financial Conduct Authority. 

A new independent review process will be established to ensure each of the 86 Administering Authorities is fit for purpose.   

Tom Selby, director of public policy at AJ Bell, said the megafunds would benefit from economies of scale but there were concerns about risk.

He said: “My overarching concern is that the needs of the saver, whose money is ultimately going to be risked, will be forgotten about. There’s a reason that an occupational scheme has a trustee to look after the interests of members. Part of that is investing their money to maximise returns and get the best retirement outcomes possible.

“Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money. If it goes well, everyone can celebrate. But it’s clearly possible that it will go the other way, so there needs to be some caution in this push to use other people’s money to drive economic growth.”

Baroness Ros Atlmann, a former Pensions Minister, welcomed the initiative and said she would like to see at least 25% of new contributions invested in domestic assets, if pension funds want tax relief. She pointed out that other countries’ pension funds are "massively overweight" in their domestic markets, while UK pension funds are heavily underweight.

Nausicaa Delfas, chief executive of The Pensions Regulator, said: “We welcome the bold reforms announced by the Chancellor which will accelerate the move towards a consolidated market of fewer, larger pension schemes better equipped to deliver for savers and invest in the UK economy.

“Backed by new powers, we can make sure larger schemes deliver real value for money for pension savers and raise standards across the market, while also encouraging innovation in new models.”