UK Government Unveils £25bn Pension ‘Megafunds’, Considers ‘Bath Tax’ and Scrapping Two-child Benefits Limit

TBA
Jun 2
4 min read

Prime Minister says government 'will look at' scrapping two-child benefits limit

UK Prime Minister Keir Starmer has said his cabinet will consider scrapping two-child benefits limit—his clearest signal yet that he may change his position on the issue.

The Two-Child Benefit Cap was introduced by the Conservative government in 2017 to control public spending and encourage family planning. Under this policy, for children born after April 2017, families can only claim Child Tax Credit and Universal Credit for the first two children. Any third or subsequent children are not eligible for these benefits.

Starmer had clearly stated in 2023 that he would not remove the cap. However, after the Labour Party came to power last year, he expressed a desire to scrap the cap if financial conditions allowed. But he later reaffirmed his opposition to removing it, and shortly after taking office following the general election, he suspended seven Labour MPs who voted with the Scottish National Party (SNP) in support of lifting the cap.

Sources say Starmer has now asked the Treasury to assess funding options for removing the cap. This marks the Labour government’s second major U-turn on welfare policy, following last week’s surprise decision to relax cuts to the Winter Fuel Payment.

The Winter Fuel Payment is a tax-free, one-off payment from the UK government to help older residents cover heating costs during winter. The payment:

Is made once a year
Usually paid between November and December
Ranges from £250 to £600 (for the 2024–2025 winter, including the “Cost of Living Payment”)

For the 2024–2025 financial year, the Labour government introduced partial reforms: limiting eligibility to low-income pensioners who receive Pension Credit. Regular retirees who don’t claim Pension Credit were no longer automatically eligible. Now, the benefit will be extended to "more pensioners,” though specific eligibility criteria and timing have not yet been announced.

Labour plots ‘family bathtime tax’ on water bills

According to UK media reports, due to one of the driest springs in nearly 70 years in England and increasing pressure on water resources, the UK government is considering implementing a “bath tax” to support water companies in piloting a new “progressive” water pricing system.

Under this system, the more water a household uses, the higher the price per litre. The aim is to encourage water conservation and shift more costs onto high-usage households. This means larger households, those with gardens or swimming pools, and families with children would face higher water bills.

Water Minister Emma Hardy said last month in a parliamentary session: “This government supports the innovative new charging methods currently being piloted, aiming to make water bills fairer and more affordable.” She plans for all water companies to complete trials of this pricing mechanism by 2030. If successful, it could be rolled out to more customers.

Thames Water is one of the water providers leading the push for the progressive pricing system. It plans to pilot the system starting in 2027, initially implementing a three-tiered charging structure along with an “excess water surcharge.” Additional revenues will be used to subsidize water bills for the poorest households.

However, the water industry notes that large-scale implementation depends on the widespread adoption of smart water meters. According to government data, only about 12% of households in England currently have smart meters installed, while 60% still use traditional meters.

In response, industry representatives are urging the government to legislate mandatory installation of smart meters to enable real-time monitoring of water usage. However, a government spokesperson has denied any plans for legislation on smart meters or “advanced water pricing.”

Reeves outlines plan for £25bn pension 'megafunds'

Following the announcement of the “megafunds plan” in November 2024, the UK government has recently unveiled detailed pension reform proposals and plans to push legislation through the Pension Schemes Bill. The reforms are expected to provide retirement savings for the majority of British workers in two main ways.

This initiative will not only unlock over £50 billion in investments flowing into infrastructure, new housing, and domestic businesses but will also significantly boost retirement incomes for millions of UK workers.

First, the UK has 86 different local government pension schemes covering the retirement security of over 6 million people, most of whom are low-income women. The reform primarily targets two types of pension systems:

Defined Benefit (DB) Pensions

Currently, these pensions hold total assets of £392 billion. The government plans to consolidate them into six asset pools by March 2026. With defined benefit plans, workers contribute to their pension accounts and receive a predetermined amount based on their salary and years of service. For the first time, “local investment targets” will be set to ensure part of the funds supports local economic development.

Defined Contribution (DC) Pensions

Covering millions of employees in both private and public sectors nationwide, these pensions hold assets totaling £800 billion. Unlike DB pensions, returns depend on investment performance. The government aims to promote consolidation, increasing the number of large pension funds with assets over £25 billion from the current 10 to more than 20 by 2030. In the Mansion House Agreement signed earlier this May, 17 of the UK’s largest pension institutions committed to allocating at least 10% of their assets to unlisted sectors such as infrastructure, housing development, and startups in emerging industries; of this, 5% will be invested specifically in UK-based assets. This move aims to address the long-standing “underinvestment” issue affecting the UK economy.

The Treasury states that the new scheme will bring over £50 billion in additional investment into UK infrastructure, new homes, and businesses. It is expected that workers with average incomes could see their defined contribution pension accounts increase by up to £6,000.

The UK’s pension reform draws inspiration from large pension investment models in Australia and Canada, aiming to treat pensions not only as retirement security tools but also as “long-term capital engines” to drive national economic growth.

Although there remains some debate within the pension industry about government intervention in investment direction, Chancellor Rishi Sunak said: “This is a crucial step towards making pensions more sustainable and more rewarding. Our goal is to deliver better returns for workers while ensuring funds support Britain’s future.”