Mega funds, mega pools and mega changes – the impact of the UK Government’s pension reforms on private capital

Key messages

The UK pension market is the largest in Europe and second largest in the world after the US and is undergoing significant reforms that are relevant to private capital managers.

There are three key themes that stand out for the private capital industry from the UK Government’s reform agenda, summarised as:

1. scale and consolidation via a series of mega-funds and mega-pools of pension capital;
2. increasing investments in private assets and investments, particularly in the UK; and
3. developing greater expertise and sophistication to shift pension industry culture from a focus on cost to delivering better investment performance.

The Government has estimated the proposals relating to the Defined Contributions (DC) market alone will provide £74bn worth of assets allocated to private markets by 2030, an additional £48bn over the baseline. Investment in UK local productive assets by the Local Government Pension Schemes (LGPS) is expected to reach nearly £28bn by 2030.

Background

The UK Government has announced a series of measures to push further and faster in its reform of the pensions industry.

On 29 May 2025 the Government set out its plans in the Pensions Investment Review Final Report (the Final Report), along with a series of consultation responses covering DC schemes, Defined Benefit (DB) schemes and the LGPS. This comes off the back of the 2025 Mansion House Accord, an industry-led agreement for DC pension providers to invest 10% of their default funds in private markets with 5% of that focused on UK investments by 2030 (doubling the private market target that had been established just two years ago through the 2023 Mansion House Compact). We explore the detail of this agreement in our article The Mansion House Accord and its impact on private capital markets.

The Government has also published its new Pension Schemes Bill which delivers the legislative framework for a number of these changes and a Roadmap which sets out how the Government envisages the package of reforms fits together and the anticipated time scale for implementation. More detail is expected in the implementing regulations and guidance which have not yet been published.

Key measures and their impact on private capital

We set out below the key points the private capital industry should be aware of alongside a summary of the measures.

Defined Contribution schemes

Scale and consolidation

• The Government’s push to scale up DC pension funds is designed to take advantage of the economic benefits of larger pension funds and boost their investment capabilities.
• As a result, private capital managers should observe pension funds developing greater expertise and interest in more diversified investment portfolios across private capital markets.

The Government will legislate to ensure each non-associated multi-employer DC pension provider / scheme has at least one “main scale default arrangement” with £25bn in AUM from 2030. There will be a transition pathway to allow additional time for some schemes to reach this scale, but the expectation is for all non-associated multi-employer DC schemes to have reached this target by 2035.

To address market fragmentation the Government has proposed that new default arrangements will need to apply for regulatory approval. It will also take action to reduce the number of non-main default arrangements that are delivering poor value.

The Government also wants to see at-scale providers demonstrate they have the requisite in-house investment capabilities and meet certain governance requirements.

Cost and performance

• The Government’s agenda to shift the culture of DC schemes towards investment performance should broadly be welcomed by the private capital industry. The Government is proposing a framework that will encourage a greater focus on long-term returns and investment performance and promote more investment in productive assets.
• Private capital managers will be under pressure to justify costs and remuneration strategies to build confidence in the DC pensions market.
• The Government highlights examples of at-scale pension providers being able to negotiate lower asset management fees, but wants the pensions market to use those savings to re-invest in developing expertise to invest in a broader range of strategies.
• Private capital managers will also need a clear understanding of the new reporting obligations placed on DC pension scheme providers through the temporary asset allocation transparency framework and Value for Money framework to ensure they can meet the expectations of the pensions industry.

The Government has set in motion the introduction of Value for Money assessments to shift the culture from a focus on cost to delivering value for members. The framework will impose a series of assessments and disclosure obligations on DC pension providers including the investment performance by 2028. Such is the Government’s interest in investment patterns across the market, in advance of the Value for Money reporting obligations, the Government announced it will introduce a temporary data collection exercise for pension schemes of their asset allocation broken down by asset class and sub-asst class along with UK/non-UK investment splits from early 2026.

The Government is also planning to introduce a contractual override to enable providers of DC contract-based pension schemes to modify or transfer pension savers (at volume) to better value and more efficient schemes without their consent (subject to certain preconditions).

Increasing investments in private assets and investments in the UK

• Private capital managers will need to adapt by making sure that investments, structures and organisational factors are aligned with the overall interests of the pension schemes.
• The Government has acknowledged it will need to develop a strong pipeline of investment opportunities in the UK. It’s important that the industry takes on board the Government’s wider agenda and looks to invest in major investment areas identified such as grid connections, data centres, solar farms, wastewater treatment plants, clean energy, housing, air travel, rail and water connectivity as well as eight further growth-driving sectors.

In line with the Mansion House Accord, a voluntary agreement by 17 of the largest DC pension providers to invest 10% of their default funds in private markets with 5% of that focused on UK investments by 2030, the Government has concluded it will not set a mandatory investment target.

However, if the pensions industry does not make sufficient progress on these targets, the Government has proposed legislation that will effectively reserve the right to set a quantitative target to invest in a broader range of private assets (including a UK target) in the future.

Defined Benefit schemes

Scale and consolidation

• As the commercial DB superfunds market develops the private capital industry is likely to significantly benefit from the scale that these arrangements offer.

The interim authorisation regime that has been implemented by the Pensions Regulator will be replaced by a legislative regime. There is currently only one commercial DB superfund, Clara.  While we expect other superfunds to follow, they may decide to wait until they have more detail on the exact requirements for the new regime (which will be set out in regulations).

The Government has decided to put on hold its proposals for a government backed consolidator for situations where small and underfunded DB schemes are unable to access commercial solutions.

The defined benefit pensions market will remain fragmented for the foreseeable future as the Government does not want to compete with commercial solutions on the market such as insurance buyouts.

Increasing investments in private assets and investments in the UK

• Private capital managers will want to identify portfolio entities with DB scheme surpluses as capital may be available to re-invest within the portfolio business (subject to pension member protections).

The Government has set out proposals to remove barriers to release surpluses trapped in DB pensions schemes (subject to the scheme being funded to a prudent level to protect members’ benefits). A statutory override will enable trustees to make changes to their scheme rules to allow surplus sharing designed to boost employer investment in their business or provide increased benefits to members. The Government has said it will not mandate how the surplus is used.

Local Government Pension Schemes

Scale and consolidation

• Private capital managers will need to establish relationships with the six remaining LGPS mega-pools on the expectation that the pools will have a greater propensity to invest in alternative asset classes than was previously the case.
• For managers with commitments from ACCESS and Brunel pools it will be important to engage with the pools as part of the transition process.

The Government has restated its commitment to move ahead with reducing the number of LGPS pools to six (from eight). Following a review of business plans submitted by the pools, the Government has invited the administrating authorities (AAs) of two pools (ACCESS and Brunel) to engage with the six remaining pools to identify which they wish to form a new partnership with. The Government has introduced legislative powers to force an AA to participate in a specified pool if this has not been decided by 30 September 2025. The transition is expected to be completed by March 2026.

With a view to unlocking the investment potential of the LGPSs the Government has set out its intentions to tackle fragmentation and inefficiency by requiring all AAs to transfer the management of all assets (listed and unlisted) to the pool.

The Government will also allow greater pool collaboration enabling a pool to invest through another pool, delivering greater benefits of scale. This will be through an amendment to the Procurement Act 2023 which has to date restricted a pool to only act in the interests of its own partner AAs.

Increasing investments in private assets and investments in the UK

• With the expectation that LGPSs will continue to support “local investment” private capital managers that deploy capital in the UK might want to consider how they position their products to the six LGPS pools to align with these new requirements.
• With the six pools taking responsibility for the due diligence of local investment opportunities, private capital managers will want to establish a direct relationship with them to identify potential opportunities.

The Government is seeking to ensure LGPSs continue making local and regional investments. AAs will be expected to publish their approach to local investment and set a target range. Although the Government does not intend to stipulate what the target is, additional transparency is expected to boost local investment over time. Pools will be required to report annually on total local investments made on behalf of the AAs and their impact.

The Government proposes that AAs will work with strategic authorities to identify local and regional investment opportunities, however the six LGPS pools will be tasked with undertaking the due diligence of the investment and to take the final decision on whether to invest or not.

Local investment is not an asset class itself so many different types of investment will be capable of supporting these goals. Local investment will be broadly defined as local or regional to the AA or pool and there will be a requirement to demonstrate “quantifiable external benefit to the area in question, such as economic growth, environmental benefit or positive social impacts”. The implementing regulations and guidance are expected to provide more detail on what this entails.

Cost and performance

• Private capital managers may face more pressure on fees as the expertise and capabilities of the LGPS mega-pools are expected to grow over time with their mandate to make investments directly.
• Private capital managers will want to prioritise developing relationships with LGPS pools where the centres of excellence match their strategies.
• Private capital managers may seek to provide data metrics in a way that is helpful to LGPS pools’ new performance reporting requirements.

In line with the Government’s ambition to create large pools of professionally managed capital, the Government has proposed a series of measures to enhance the capabilities and governance of AAs and LGPS pools.

The Government is seeking to place greater emphasis on the performance of investments over cost. As such the Government will require AAs and LGPS pools to report on the extent and impact of their local investments and require LGPS pools to publish performance and transactions costs.

The exact reporting requirements are still in development, however the Government indicated in its consultation response it would engage with LGPS pools, AAs, and other users before they are finalised.

Under a new framework, AAs will retain responsibility for setting their overall investment strategy, however they will be required to delegate the implementation of the strategy to the LGPS pool. AAs will be required to take investment advice from the LGPS pools The LGPS pool would be required to be FCA authorised to implement the investment strategies and provide necessary assurance to members and employers that the large pools of investment funds will be appropriately managed.

As all LGPS investment assets will be under the management of the LGPS pools, the pool is expected to have a comprehensive overview to make all investment decisions surrounding those assets. The Government notes that it is not the intention for assets to be sold and transferred to the LGPS pool, instead the pool will be responsible for the management of the asset i.e. responsible for deciding whether to buy, sell or hold.

The Government is committed to fostering greater collaboration between the LGPS pools and will explore developing LGPS pool “centres of excellence” in specialist asset classes such as private equity and infrastructure.

Next steps

The Government will move forward with parliamentary process of the Pension Schemes Bill as the primary legislative vehicle to implement these changes. This will be supported by (yet-to-be published) regulations and guidance which will set out more of the detail. A further phase of the Pensions Review, that will focus on adequacy of pension outcomes, is expected later this year.