Why does Rachel Reeves want to copy Canada’s pensions model?

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The chancellor, Rachel Reeves, met the bosses of Canada’s big retirement schemes in Toronto on Wednesday, prompting speculation that Labour is planning to bring the country’s public pension model to the UK. But what would that entail and could such a change actually work? How is a Canadian-style pension scheme different from the UK model? Canada’s public sector pension schemes, like those in Norway and Australia, have been consolidated into larger funds which are managed in-house by professional investors. Once pooled, public sector retirement funds can invest larger sums of money into a wider range of riskier and long-term assets like infrastructure, startups and private equity. Canada’s top schemes, known as the Maple 8, collectively manage around $2tn (£1.1tn) worth of taxpayer-backed pension schemes for the likes of teachers, municipal employees and healthcare workers. In the UK, however, there is a focus on reforming one single, but very large, portion of the pension landscape: the local government pension scheme. The LGPS is the national pension scheme primarily for people employed by local governments. It is one of the largest defined-benefit schemes – offering final salaries to retirees – in the world, with 6.5 million members, and £360bn in assets. However, the scheme is fragmented into 86 individually managed retirements funds that vary in size: while Orkney and the Isle of Wight had around £500m and £700m in assets, respectively, as of 2022, Greater Manchester had around £27bn. Those pushing for consolidation say a pooled LGPS fund would be able to deploy large sums of cash to growing businesses and infrastructure projects, including in the UK. Critics of the current model also say pooling would help reduce inefficiencies, helping save at least £1bn in fees paid to teams of lawyers, banks, advisers, asset managers and actuaries each year. Is this idea new? There have been various attempts to create superfunds of some type over the past decade. In 2015, the then prime minister, David Cameron, started to push local government pension scheme funds into larger pools, with the intention of cutting investment costs and allowing for collective investment in assets like infrastructure. However, there was no immediate deadline for how quickly individual schemes had to shift their assets into intermediate vehicles, which themselves came under fire for adding another layer of costs. Only £145bn or 39% of LGPS assets have been transferred to the eight current pools, according to the Pensions and Lifetime Savings Association, a trade association for workplace pensions. Last autumn, the Conservative then chancellor, Jeremy Hunt, hinted at further consolidation, saying that by 2040, all local government pension fund assets would be invested in vehicles worth £200bn or more, leading many to speculate he wanted to cut groupings down into two or three pools. However, so far governments have stopped short of introducing laws that would compel schemes to do so.