The UK government is exploring a Canada-inspired pension system to boost efficiency and infrastructure investment. ICAEW Insights looked at how this compares with the UK’s existing model.
Chancellor Rachel Reeves is exploring a Canadian-inspired model to reform the UK’s public sector pension system, sparking debate over whether it benefits pension holders or simply unlocks funds for infrastructure. In Canada, public sector pensions are consolidated into large, professionally-managed funds, investing heavily in diverse assets like infrastructure and private equity.
The country’s top eight pension funds, known as the Maple 8, manage around C$2tn (£1.1tn) for public workers. These funds include the Canada and Quebec pension plans and major provincial pension investment boards. David Petrie, ICAEW’s Head of Corporate Finance, commented:
“Unlike Canada, most public sector pension schemes in the UK – for the NHS, teachers, civil servants, armed forces, police and fire services – are unfunded and paid for out of current taxation and so do not have any investments. The exceptions, such as the Parliament, BBC and the Bank of England pension funds, are relatively small in size, leaving the LGPS as the only sizeable public sector pension scheme in the UK with the scale to support major infrastructure projects.
Although the introduction of eight investment pools over the past four or five years has seen some consolidation already, the amount available for infrastructure investment remains relatively low in comparison with what might be possible with a single fund.”
John Gaskell, ICAEW’s Head of Personal Financial Planning, explains why this model is under consideration and how it compares to the current UK system, he said:
“One of the key arguments around the Canadian pension schemes, which Reeves seems to be focusing on, is the potential for economies of scale,” he notes. “She appears to suggest that having numerous local authority pension schemes may not be the most efficient model, due to duplication of costs and other inefficiencies.
It raises the question of whether there is an optimal size for a scheme and whether a scheme that becomes very large could actually end up being less efficient. The concern is that using pension funds to address public infrastructure may lead to prioritising these projects over the best interests of retirement members.”
