The Government has published an amendment to the Pension Scheme Bill to limit the extent to which it can ‘mandate’ how defined contribution pension schemes invest.
The change was made after there was concern about the original wording, which could have allowed ministers to force pension funds to invest in risky assets, according to critics.
The Bill allows vital reforms that stand to reduce the cost of administering pensions, remove complexity for savers and help ensure schemes are maximising the value they provide.
But trade body Pensions UK warned that if the original mandation power was exercised, it would “hamper free and open market competition” aimed at driving better saver outcomes and put those outcomes at risk.
Former Pensions Minister Baroness Ros Altmann warned the original wording could mean ministers ordering pension funds to invest in 'high risk, pet projects' which would suit government political strategy but would leave pension scheme members subject to excessive risk.
The mandation clause has now been watered down by being limited to no more than 10% of total assets held in default funds and by no more than 5% in UK-based assets.
Pensions UK said the values are now in line with the amounts prescribed in the Mansion House Accord, a voluntary agreement signed by 17 of the UK’s largest DC pension providers to invest more of their assets in unlisted investments both globally and in the UK.
Julian Mund, Chief Executive of Pensions UK, said: “The amendment to the reserve power which mandates DC pension schemes’ asset allocation addresses our most serious concern and brings the legislation in line with the Government’s stated intention of acting only as a backstop to the Mansion House Accord.
“We would like, in addition, to see the sunset clause brought forward to lessen the political risk attached to the power.”
He added: “While we do not expect the power to be used, we are clear that asset allocation decisions must rest with trustees acting in their members’ best interests.”
David Brooks, head of policy at consultancy Broadstone, said: “The changes to the mandation power are a welcome acknowledgment of the progress being made through voluntary industry action. That said, it still feels as though policy is moving too quickly towards regulation before giving that voluntary approach time to prove itself.”
He warned that it’s not yet clear that the challenge is one of willingness or capability alone. “What risks being overlooked is whether there is a deep and consistent pipeline of investable opportunities that genuinely suit pension scheme needs. Asset allocation targets, by themselves, do not create investable markets.”
He said that if the joint aim is long‑term value for members, the focus should be on building the right conditions for investment rather than holding regulatory powers in reserve to compel outcomes.