The Mansion House Reforms: Will pension superfunds supercharge UK investment and M&A?

The Chancellor of the Exchequer, Rachel Reeves, has declared growth to be her “number one mission”. This has brought the UK life and pensions industry, and the funds that they manage, sharply into political focus. During her Mansion House address in November 2024, the Chancellor announced proposals to encourage the consolidation and pooling of assets of: (1) the UK defined contribution (DC) pension sector; and (2) the Local Government Pension Schemes (LGPS) in order to scale and harness these funds for productive investment in UK infrastructure and other private assets to meet the UK’s most pressing socio-economic challenges such as the energy transition (the Mansion House Reforms). 

This article outlines the key features of the Mansion House Reforms and considers whether these superfunds could, in the medium to long term, supercharge UK M&A and related investment activity.

The proposals build upon the work of the prior government, reflecting a broad political consensus on the need to develop this pool of capital and, in formulating the proposals, the UK Government is expressly seeking to emulate the practices in Australia and Canada, where pension funds have reportedly invested ten times more in private equity than their UK counterparts.1

The Mansion House Reforms

The reforms are set forth in two consultations. The first covers the proposal to consolidate and enhance the scale of DC pension schemes (including in the Master Trust market)2; and the second aims to consolidate and pool the assets of the LGPS3.

Consolidation of the DC scheme and Master Trust market

The UK Government considers that the DC scheme and Master Trust market (forecast to comprise £800bn of assets by 2030)4 is overly fragmented, particularly in the number of underlying default funds. The UK Government is seeking to expedite consolidation through the: (i) introduction of minimum size requirements and limits on the number of default fund arrangements for multi-employer schemes; and (ii) implementation of contractual ‘override’ capabilities to allow schemes to circumvent the need for individual consent to the bulk transfer of assets in respect of contract-based schemes. This would be reinforced by regulations requiring DC scheme trustees to place a greater focus on investment return than cost, building upon the recent Value for Money (VFM) Framework reforms. 

Pooling LGPS assets

The UK Government is also seeking to tap the resources of the LGPS, which as at March 2024 reportedly held in aggregate £392bn of invested funds, seen as an underutilised source of capital for UK investment. The key proposals to unlock this opportunity are: (i) requiring all the administering authorities of the LGPS funds to delegate the management of their assets to one of the eight existing asset pools; (ii) enhancing the standards and governance applicable to this delegation; and (iii) introducing obligations to consider local growth opportunities in connection with investment strategies.

The consultations closed on 16 January 2025. The UK Government intends to publish interim findings ahead of the publication of the Pensions Scheme Bill in 2025 and a final report in spring 2025.

Prospects for unlocking UK investment

Driving the reforms is a view that scale – in particular, in the case of the DC schemes and Master Trusts, assets under management of £25bn-£50bn - is critical to the ability of funds to access a wider range of investment opportunities in productive asset classes. These include increased investment in: (i) infrastructure projects, including by way of both equity and debt finance; and (ii) private equity, venture capital and unlisted equities. The UK Government also considers that increased access to these resources will develop greater capabilities in sourcing, executing and managing illiquid asset opportunities. These mirror the objectives of the recent overhaul of the Solvency II insurance regulatory regime, in particular the changes to the matching adjustment regime.

If this pool of capital can be directed towards UK investment opportunities, this could in theory result in a significant increase in M&A activity as funds allocate more capital to private equity investment strategies. However, any such increase would likely only be felt in the medium to long term as the UK Government does not expect the DC scheme market to implement the reforms (if they become law) until 2030, although the LGPS asset pooling is proposed to be completed by March 2026. Changes to investment strategy and allocations would also take time to play through to deal execution.

The reforms have been met by a cautious response by the industry, with scepticism that scale is the critical limiting factor on pension fund investment in the UK and concerns that minimum size targets could negatively impact competition, innovation and investment in smaller local opportunities whilst also penalising better performing smaller schemes. Respondents have suggested the UK Government should instead focus on policies that could increase the attractiveness of UK investment, e.g. fiscal incentives such as reducing stamp duty on UK equities or reinstating the dividend tax credit for UK pensions funds or measures within a broader industrial strategy to increase the range of attractive UK investment opportunities (e.g. further planning reform). 

From a legal perspective, there are also concerns that mandating (directly or indirectly) national or local UK investment could cut across trustees’ and local authorities’ fiduciary duties to members, which otherwise would encourage appropriately diversified portfolios focused on the most attractive available global opportunities. Others consider that the VFM Framework should be given more time to embed. There are also concerns that delegating investment strategy to the LGPS pools would divorce authorities from decision making and result in the pools “marking their own homework”.

Nonetheless, accessing pension fund capital is evidently a core political and economic priority for the UK Government as part of its wider push to encourage the regulators to encourage more ‘responsible and informed risk taking’ as ‘prerequisites for growth’.5 In this context, the UK Government has warned the industry, starkly, that if more capital is not directed towards UK investment, it will consider whether ‘further interventions may be needed by the government to ensure that these reforms, and the significant predicted growth in DC and LGPS fund assets over the coming years, are benefiting UK growth.’6

We expect other areas of focus to include the assets of the Pension Protection Fund, in addition to the impact on UK investment of the currently buoyant bulk annuity and funded reinsurance markets. The UK Government’s reform drive has also expanded to occupational defined benefit pension schemes, with an announcement of further proposals on 28 January 2025 to unlock a reported £160bn in surplus funds in private defined benefit schemes. Details of the reforms will be published in the UK Government’s response to the Options for Defined Benefits consultation, due in Spring 2025.

The pace of reform looks set to continue. The market and its advisers should watch developments closely in the coming months.