No, not another commentary on Donald Trump’s ‘One Big, Beautiful Bill’—but rather an exploration of the complexities associated with the government’s desire to create large, beautiful mega pension funds.
In her Mansion House speech in Leeds in July 2025, the Chancellor, the Rt Hon Rachel Reeves, referred to this:
“The creation of Defined Contribution and Local Government Pension Scheme megafunds… will mean larger and more powerful pots of funding invested productively across the country.”
This round of pension reforms began in November 2024 with the twin goals of consolidating the fragmented pension market and unlocking productive capital for the UK economy. Smaller DC schemes and the ‘crown jewels’ of the LGPS face pressure to merge, thereby creating more effective pools of assets that could invest greater amounts in UK private equity and infrastructure somewhere where the life insurance industry is already moving to.
The intention is that the multi-employer Master Trust and GPP DC schemes will be consolidated, with a target minimum size of £25bn by 2030. The number of LGPS DB asset pools will reduce from eight to six.
The benefits of larger pools of assets are well-rehearsed:
- Improved end-member outcomes through greater investment expertise, wider investment diversification, and improved governance
- Economies of scale through stronger purchasing power
- Access to higher-return strategies, including private market assets
There is a point at which scale can become a liability, but no UK scheme will approach Japan’s Government Pension Investment Fund (AUM $1.7trn) or face its difficulty in delivering anything beyond market returns.
However, there are a variety of issues to consider in executing and implementing any transitions or consolidations. The politics (with a small ‘p’) involved in deciding who consolidates with whom will have been painful. The post-merger integration phase will involve new stakeholders and decision-makers, and even where there is a shared desire to work constructively, a clear plan must be developed. This plan must be driven by a long-term strategic vision, not based on the lowest common denominator. Without this, the integration roadmap risks becoming a divisive tool rather than a unifying framework.
It is self-evident that the new end-state strategy should serve the best interests of members, but there may be conflicting pressures. Financial services rightly focus on integrity and customer-first principles, but these can clash with political ambitions to deliver UK economic growth within a Westminster voting cycle. An ideal scenario would see these objectives align, but in practice—particularly regarding listed UK equity allocations or regional investments—such alignment may not always be feasible. Fiduciary duty must remain paramount, underpinned by strong governance and a transparent communication strategy.
Aligning and harmonising investment strategies and portfolios must be carefully planned, with differences in approach and risk tolerance actively managed. Transitioning to a new investment state is relatively straightforward in liquid, non-taxed markets, but additional complexity arises in jurisdictions such as the UK, Ireland, Hong Kong, and India—particularly with tax treatment, derivatives contracts (especially OTCs like FX forwards), and custody account restrictions. Mitigation planning must be both proactive and precise.
The government has made high-level assurances that regulation and tax will not obstruct these reforms. Nonetheless, regulatory and HMRC compliance issues will undoubtedly emerge, requiring careful navigation.
Technological and operational integration brings its own hurdles. Merging funds may operate across diverse systems for trade execution, portfolio management, compliance, and reporting. Harmonising data is essential and must be embedded within the data migration plan. Several downstream processes also cannot be left to the end:
- Performance tracking and reporting (including pre- and post-merger chain-linking methodologies)
- Fund factsheets and reporting
- Specific fund risk management
- Ongoing Assessment of Value & Consumer Duty analysis
A comprehensive risk mitigation strategy must be developed to avoid operational disruption. All this must occur while ensuring business-as-usual activities remain unaffected. Even with external consultants and project support, there will be immense pressure on internal SMEs, as each organisation’s unique characteristics must be understood.
Management and transition costs cannot be underestimated—particularly when the entire sector is undergoing similar changes simultaneously. The complexity of this endeavour reinforces the need for detailed planning and a unified strategy, guided not only by a fear of failure but by a commitment to long-term fund performance and member benefit.
Success hinges on navigating regulatory, operational, and technological challenges—while remaining laser-focused on customer interests and sustainable growth. Ilex has the breadth of experience and expertise to help with these complex issues, and would be delighted to assist.
