Chancellor Rachel Reeves is considering what she calls the “biggest pension reform in decades” in a bid to boost economic growth.

The government wants to merge the UK’s 86 municipal pension schemes into a handful of “mega pension funds”.

It is hoped the changes will see billions of pounds invested in the UK in areas such as energy infrastructure, tech start-ups and public services.

Reeves told the BBC that Britain’s public sector pension funds in their current form were not large enough to generate good returns for British savers, but some say the changes are not without risk.

Workers on local authority schemes receive a pension based on salary and length of service – known as a defined benefit pension – and they will see no change in their payments as a result of these schemes.

Most private sector workers participate in schemes in which they contribute each month to a savings pot, and their eventual pension depends on the amount of this when they retire.

The government is considering setting a minimum size for these defined contribution plans. This could affect the growth rate of your retirement savings.

Reeves told the BBC ahead of her first speech as chancellor at the annual Mansion House investors’ gathering in London that she wanted the UK’s pension systems to be more like those in Canada and Australia.

In these countries, the pensions of local officials, such as teachers and civil servants, are pooled into a handful of funds capable of making large investments around the world.

“They probably have the best pension funds in the world,” Reeves said.

The pension reforms are part of Reeves’ plan to boost growth and come after many companies criticized the increase in employers’ national insurance contributions in the budget.

She told the BBC that she was “not immune to this criticism, but that it was necessary to increase taxes” to put the state’s finances in order and “properly finance” the public services.

The government plans to merge the 86 council pension funds – which include £354bn of investments and are managed by local government officials – into “megafunds” managed by fund managers.

Reeves has decided not to force pension funds to invest in UK companies, but he will require each fund to specify a UK investment objective.

Separately, the government also wants to set a minimum size for private sector defined contribution schemes, which manage around £800 billion of investments, to encourage the consolidation of around 60 different multi-employer schemes.

The government says its changes could “unlock” £80 billion of investment in the UK.

“Our pension funds in Britain are too small to make investments that provide a good return for people saving for retirement and to help our economy grow,” Reeves said.

She added that it made “no sense” that Canadian teachers and Australian professors were more likely to invest in many long-term UK assets than UK savers.

Iain McGill, chief executive of British biotechnology company Quell Therapeutics, told the BBC the proposed changes could help companies like his.

He says there comes a time when access to “significant” funds is necessary for biotech companies to grow.

Currently, most of these funds are in the US, “and if we don’t have access to them in the UK, that’s when a lot of companies decide to set up shop in the US “.

The UK pension fund market is “incredibly fragmented”, according to Helen Morrissey, pensions expert at Hargreaves Landsdown.

Running these programs costs money. Everyone must pay administration, governance and management fees.

If larger funds are created by combining smaller funds, Morrissey says, they will have the size to invest in larger projects.

They also have greater negotiating power to reduce fees, which should increase investment returns, and may have the ability to hire their own investment experts.

Tracy Blackwell, chief executive of Pension Insurance Corporation, told the BBC: “I think by having the right scale and expertise in-house to invest in a wide range of assets, they will be able to ‘invest in more than they can. invest now. »

An example of what might be possible occurred Wednesday, when Canada’s pension fund, the Public Sector Pension Investment Board, bought the company that owns Aberdeen, Glasgow and Southampton airports in a deal worth more than £1.5 billion.

However, larger investments can also carry greater risks, with Canada’s pension fund, the Ontario Municipal Employees’ Retirement System, being the largest investor in this area. The troubled waters of the Thames.

Gervais Williams, head of equities at Premier Miton, said combining small projects into megafunds was a “mistake”.

“They’ve always been able to invest in big companies, but also in small companies. These mega funds, by implication, will invest in mega companies and many of the smaller companies will unfortunately be less important in the future.”

Some have argued the changes could pose retirement risks for savers.

“Conflating the government’s aim of boosting investment in the UK with citizens’ pension outcomes presents a danger as all the risks are taken with members’ money,” said Tom Selby of the investment platform AJ Bell.

He said the current system encourages trustees to deliver the best outcomes for members rather than focusing on UK-wide economic growth, which could involve investing outside the UK.

Others question whether there are enough large projects in the UK to invest in.

“Large funds need substantial, reliable projects to generate returns, but the market may struggle to provide enough of these opportunities, particularly in the infrastructure sector,” said Jon Greer, head of retirement policy at wealth manager Quilter.

Shadow chancellor Mel Stride said the Conservatives will “look closely at the details of what Rachel Reeves sets out – particularly around the requirement to determine where investments should be made”.

Former chancellor Jeremy Hunt said there was ‘a lot to welcome’ in Reeves’ plans, adding that it was broadly “the same strategy and approach” that he announced in his Mansion House reforms last year.