The UK government has unveiled a plan for a comprehensive overhaul of the pension sector, aiming to create 'megafunds' through consolidation, which could unlock significant investment in domestic infrastructure, projects, and new businesses.

Chancellor Rachel Reeves, in her first Mansion House speech, outlined the plans to tackle the fragmented pensions landscape and drive economic growth.

The Pension Schemes Bill, set for introduction next year, will merge defined contribution (DC) schemes and pool assets from the Local Government Pension Scheme authorities.

This strategy is expected to mirror successful models in Australia and Canada, where larger pension funds have the capacity to invest in high-growth potential assets.

The reforms could unlock approximately £80bn ($100.97bn) of investment while enhancing pension pots for DC savers.

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.”

Currently, the UK's pension system, comprising the Local Government Pension Scheme and DC market, is projected to manage £1.3trn in assets by 2030.

However, a reportedly fragmented structure has limited the system's ability to invest in new businesses and substantial infrastructure projects.

An independent review process will be established to “ensure each of the 86 Administering Authorities is fit for purpose”.

DC pension schemes are expected to manage £800bn by the end of 2030.

Currently, there are currently approximately 60 multiemployer schemes in the country, with each investing savers’ money into one or more funds.

The government plans to consult on establishing a minimum size requirement for these funds so that they deliver on their investment potential.  

The government will also seek input on measures to support the consolidation into 'megafunds', including legislation that would make it easier for fund managers to transfer savers from underperforming schemes to those offering higher returns.