UK Finance Minister Rachel Reeves eyes pension funds to tackle country's investment gap

Rachel Reeves, the UK Chancellor of the Exchequer, is pushing to harness the country’s vast pension wealth to drive investment in infrastructure, research, and development.

Despite the UK’s position as the third-largest funded pension market globally, with £2.9 trillion in assets, it remains one of the G7’s most investment-poor nations. For decades, the UK’s investment-to-GDP ratio has lagged, averaging only 19 per cent over 40 years, according to the National Infrastructure Commission.

Instead of mandating pension investments through legislation, Reeves is pursuing a strategy focused on removing obstacles to investment, Financial Times reported.

A key part of her plan involves restructuring the Local Government Pension Scheme (LGPS) — the UK’s largest funded pension scheme, which oversees approximately £400 billion across 86 individual funds.

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LGPS currently operates in a fragmented system, where each fund is managed independently by local councils, incurring about £1.7 billion in fees annually, mostly to investment managers.

Reeves intends to consolidate these funds into eight pension “megafunds” to streamline operations and reduce fees, enhancing the ability to invest at scale.

While previous governments attempted a similar approach, results were mixed, with less than half of LGPS assets pooled into collective schemes. Reeves is pushing for a more robust and cohesive consolidation that she hopes will facilitate greater investments in private markets, including infrastructure and real estate, the Financial Times report said.

Private market assets, which account for 23 per cent of LGPS investments, could see further growth under this reform, as megafunds are expected to lower fees and generate stronger returns over time.

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This aligns with Reeves’ broader economic vision, drawing on the example of Canada’s public sector pension model, where allocations to private assets reach an average of 42 per cent.

The UK’s National Infrastructure Commission has indicated that private sector investment in infrastructure will need to increase significantly — from around £30 billion-£40 billion over the past decade to £40 billion-£50 billion by the 2030s and 2040s.

By lowering barriers to cost-effective investment, Reeves aims to make it easier for pension funds to contribute to this growing need, which would not only support long-term pension returns but also benefit the broader UK economy.