UK Government Unveils £25bn Pension ‘Megafunds’ Plan to Boost Economy and Retirement Savings

The UK government has detailed ambitious reforms for the nation’s pension sector, introducing the concept of £25 billion “megafunds” designed to drive economic growth by investing a portion of assets locally.

Chancellor Rachel Reeves announced the overhaul, inspired by large pension investment models from Australia and Canada, which aims to enhance returns for workers while channeling billions into clean energy and high-growth industries.

“These reforms promise better returns for workers and significant investment into the UK’s future economy,” Reeves said.

Earlier this month, 17 of the UK’s largest pension firms endorsed a voluntary agreement aligning with these reforms. However, to ensure progress, the government plans to introduce a legislative backstop, allowing it to enforce the new rules by the decade’s end if voluntary efforts fall short — a move some industry players may challenge.

Zoe Alexander, director at the Pensions and Lifetime Savings Association, acknowledged the reforms’ “significant implications” but emphasized that consolidation could improve retirement outcomes through better governance, investment diversification, and increased bargaining power.

The City UK’s CEO Miles Celic praised the plan’s potential to “help drive economic growth,” while former pensions minister Sir Steve Webb called it “a red letter day” for pension schemes, members, and employers, highlighting the opportunity to deploy surplus funds more productively.

This reform follows a pension review initiated by the Labour government last year and targets two key pillars:

1. Local authority pension schemes: The 86 schemes covering over six million people, primarily low-paid women, will merge their £392 billion in defined benefit assets into just six “asset pools” by March 2026. For the first time, these schemes will agree on local investment targets.

2. Defined contribution schemes: Worth approximately £800 billion and covering millions of private and public sector workers, these schemes will also consolidate to form over 20 large funds exceeding £25 billion by 2030 — up from just ten currently.

Under the Mansion House Accord, the 17 participating pension firms have committed to investing 10% of their assets beyond publicly traded shares to support housing, infrastructure, and fast-growing UK businesses, with 5% earmarked explicitly for domestic investments.

The reforms, to be embedded in the upcoming Pension Schemes Bill, are projected to channel an additional £50 billion into UK infrastructure, homes, and businesses, according to the Treasury.

The government’s Pensions Investment Review, published this week, projects these changes will boost pension saver returns by cutting waste, achieving economies of scale, and enhancing investment strategies. As a result, average earners could see a £6,000 increase in their defined contribution pension pot.

This bold push by the UK government aims to modernize pension investing while strengthening the country’s economic future.