The proposal, revealed during her Mansion House address, marks one of the most significant pension overhauls in decades.

The initiative, set to be introduced through a new Pension Schemes Bill next year, will see the merging of defined contribution schemes and assets from 86 Local Government Pension Scheme authorities.

This strategy draws inspiration from overseas models, with Canada and Australia setting the precedent. Both countries have leveraged the scale of such funds to significantly boost investments in sectors with high growth potential.

For example, Canada’s pension infrastructure investments are about four times those of the UK’s, while Australian schemes allocate three times more to infrastructure and 10 times more to private equity. This comparison highlights the potential benefits for the UK, which currently grapples with a fragmented pension structure inhibiting large-scale investments.

The aspiration is clear: emulate these international examples and unlock approximately £80bn for investment in high-growth and vital sectors, which could simultaneously enhance the pension savings of millions of contributors.

However, the shift towards megafunds is not without potential downsides. Skeptics point to risks such as reduced local control over pension funds, which currently allow local government input, potentially sacrificing community-focused investments. Additionally, the centralisation of fund management could lead to increased complexity and management costs that might outweigh the benefits of larger investments.

Moreover, there are concerns about the governance structures of these megafunds, which would need to be robust to ensure the benefits are passed on to savers. The proposal includes measures to be scrutinised by the Financial Conduct Authority, and an independent review process is to be established to ensure each administering authority is fully prepared for the transition.

In terms of governance, the proposal suggests that these new megafunds will need high standards to ensure they deliver value for savers. The Local Government Pension Scheme, expected to manage £500bn by 2030, would channel its assets under professional fund managers, moving away from local councils to ensure better investment results.

For the defined contribution schemes, set to manage approximately £800bn by 2030, the government plans to consult on establishing minimum fund sizes, facilitating the transition into megafunds, and implementing mechanisms to move savers from underperforming funds to those offering higher returns.

While the potential for economic growth and improved pension returns is significant, the success of this ambitious reform will depend on careful implementation and ongoing management. By following the successful models abroad, the UK aims to strike a balance between fostering large-scale investments and maintaining local benefits, thus driving economic growth while safeguarding public servants’ pensions.

Reeves said: “Last month’s Budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we’re going for growth.

“That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britain better off.”

Deputy prime minister Angela Rayner said: “We’ve all seen the fantastic work carried out day in, day out, by our frontline workers and it’s about time their pension started working just as hard by driving investment in their communities.

“This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.”

Pensions minister Emma Reynolds said: “Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy.

“These reforms could unlock £80bn of investment into exciting new businesses and critical infrastructure.”

Greenpeace UK senior climate adviser Charlie Kronick said: “This government’s key promises – delivering national renewal, boosting the economy and tackling the climate crisis – all depend on increasing public investment.

“The chancellor is right to look at reforming pension funds to unlock their investment potential, but she also needs to make sure this money is channelled into the right industries. The UK economy needs a game-changer for funding clean energy and transport that can create jobs, stabilise energy bills, cut emissions and reduce air pollution. Pension money is an investment in our future – it only makes sense for that investment to go into industries that can help us build a cleaner, safer and better future for us all.”

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