Pension “megafunds” are set to be created to help unlock billions of pounds of investment in businesses and infrastructure.

Rachel Reeves will use her first Mansion House speech as Chancellor to outline the pensions shake-up.

Under the plans, the reforms will be introduced through a new Pension Schemes Bill next year, consolidating defined contribution (DC) schemes and pooling assets from 86 local government pension scheme authorities.

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, with local government officials and councillors managing each fund.

Now we're going for growth

Consolidating the assets into a handful of funds run by professional fund managers will allow them to invest more in assets such as infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants, the Government said.

DC pension schemes are set to manage £800 billion-worth of assets by the end of the decade.

There are around 60 different multi-employer schemes, each investing savers’ money into one or more funds. The Government will consult on setting a minimum size requirement for these funds.

Megafunds will mirror schemes in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential, the Government said.

It said the move could deliver around £80 billion of investment in new businesses and critical infrastructure.

Ms Reeves’s speech on Thursday will take place amid criticism from the hospitality sector and warnings that changes to employers’ national insurance (NI) contributions could lead to job losses.

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.”

Deputy Prime Minister Angela Rayner said: “This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.”

We support consolidation where it is in the interests of members and represents value for money

Pensions minister Emma Reynolds said: “These reforms could unlock £80 billion of investment into exciting new businesses and critical infrastructure.”

The Government said analysis indicates that pension funds start to return greater productive investment levels once the size of assets they manage reaches between £25 to £50 billion – a point where they are better placed to invest in a wider range of assets.

Bigger pensions funds of greater than £50 billion in assets can harness further benefits, including the ability to invest directly in large-scale projects at a lower cost, it added.

Megafunds will need to meet rigorous standards to ensure they deliver for savers, such as needing to be authorised by the Financial Conduct Authority (FCA), the Government said.

Ms Reeves’ speech came as Sky News and The Times newspaper reported that some of Britain’s biggest retailers have warned the Chancellor that the budget will stoke inflation and cause job losses.

The British Retail Consortium, which represents supermarkets including Asda and Tesco, reportedly said in a draft letter to Ms Reeves that its members would not be able to absorb costs, making some job losses “inevitable”.

Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), said: “Today’s reform proposals are a positive step towards ensuring our system delivers the best value for money for savers.

“We support consolidation where it is in the interests of members and represents value for money.”

It's a chicken and egg dilemma

Jon Greer, head of retirement policy at wealth manager Quilter, said the consolidation could “open new doors” for UK pensions if managed carefully but its success would depend “heavily” on the availability of new infrastructure projects to invest in.

He added: “It’s a chicken and egg dilemma.

“Large funds need substantial, reliable projects to generate returns, but the market may struggle to offer enough of these opportunities, especially in the infrastructure sector.

“If too much money chases too few viable investments, the effectiveness of this consolidation could be diluted, with funds potentially forced into riskier or less impactful projects.”

Tom Selby, director of public policy at AJ Bell, said: “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.”

He added: “There needs to be some caution in this push to use other people’s money to drive economic growth. It needs to be made very clear to members what is happening with their money.”

Tom McPhail, director of public affairs at consultancy the Lang Cat, said: “I’d urge caution here with the leap of faith that the Government is making.

“Is it safe to assume that all schemes will want to invest in the opportunities they’ve outlined?

“While investment in UK infrastructure is welcome, surely where these schemes invest is down to the trustees and they may have other ideas on what will deliver the best returns for their members.”

Association of British Insurers director general Hannah Gurga said: “Pension investments are for savers’ futures and any policy and investment decisions must be driven by a focus on the long-term, with savers’ interests at heart.

“We look forward to hearing more about the Government’s plans and will continue to work closely with our members and wider industry to deliver on mutual priorities for pensions.”