A leading financial expert has issued a dire warning over Labour’s planned pensions “megafunds”, drawing on his own experience of similar schemes.
The danger alert comes after Chancellor Rachel Reeves announced at the end of last year that she was planning on consolidating local government pension schemes and defined contribution (DC) schemes into larger, more efficient investment pools.
Announcing her “big bang” plan to help pensions grow the economy in a speech in the City of London, Reeves said it could unlock around £80billion for investment in businesses of the future and key infrastructure projects.
Reeves is hoping this will drive economic growth by enabling more significant investments in higher-risk, higher-reward assets like private equity and infrastructure projects.
An entrepreneur familiar with the ‘pitfalls’ of Labour’s planned pension reforms has sounded the alarm
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Indeed, larger funds can invest in a broader range of assets, potentially leading to better returns due to reduced management fees and increased bargaining power.
The Government can point to the success stories of Canada and Australia, where larger funds have shown the ability to invest more effectively in long-term assets.
Larger funds also benefit from economies of scale, covering the costs of expensive internal specialists, which is particularly crucial for managing unlisted assets such as private equity, venture capital, or infrastructure.
However, consolidation on this scale is not without risk to savers, or as businessman and entrepreneur Yair Bennett puts it: “Concentration of capital in fewer hands creates vulnerability.”
He speaks from experience. The founder of BOI Agent, a company specialising in corporate compliance, has worked closely with investors who have trialled similar schemes to pension megafunds.
“While the consolidation of assets into large-scale funds can reduce administrative costs and improve investment opportunities, it carries its own risks,” he told GB News.
In such a scenario, a “single misstep” in investment strategy or governance can have “ripple effects on a vast number of beneficiaries”, warns Bennett.
He explained: “I’ve observed similar pitfalls in tax pooling structures for investment companies; one client experienced a nine per cent portfolio drop when their fund overly relied on a high-risk, high-reward asset class, impacting quarterly payouts significantly.”
A ‘single misstep’ in investment strategy or governance can have ‘ripple effects on a vast number of beneficiaries’, warns industry expert
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Benson Varghese, a criminal lawyer and a criminal defence attorney, understands the risk from a legal perspective.
“When I worked on cases where shared funds were mismanaged—either because of bad investment choices or a lack of openness—lawsuits for breach of fiduciary duty were filed. A one per cent error in a billion-dollar fund can cost millions and lead to claims and government reviews,” he told GB News.
He continued: “There is no doubt that megafunds have benefits, such as giving investors more options and making it easier to make deals, but they need to be paired with strong control systems.
“The sheer size of these funds makes systemic risk more likely if they don’t have enough protections. An example of this would be a mistake in allocating assets that could affect millions of people and make losses much worse. Legally, the fact that there aren’t any clear, effective rules for megafunds makes them more likely to be sued.”
Indeed, industry chiefs from Barclays, NatWest, Lloyds Bank and Nationwide are nervous about Reeves’ scheme.
Last week, they criticised the Chancellor’s lack of clarity on the proposal, voicing concern that the creation of large funds prioritises economic growth and investment over the goals of traditional savers, noting that a “one-size-fits-all that does not meet the needs of individuals”.
For her part, Reeves has launched a consultation to gauge the industry’s appetite for such a reform before pressing ahead.
