Mandating asset allocations could distort financial markets, compromise saver outcomes, and damage trust, according to the retirement and insurance sector trade bodies, as they launch another campaign to persuade the government to drop its mandation clause from the Pension Schemes Bill.
Pensions UK’s chief executive Julian Mund declared that “now is the time to drop the reserve mandation power from the bill”, as the legislation has reached the report stage in the House of Lords.
In a statement today (3 March), Pensions UK said the reserve power “extends significantly beyond the government’s stated intention”, which was to provide a backstop to the Mansion House Accord.
“The current drafting of the provision goes far beyond the scope of the Mansion House Accord and could be used to direct investment in very broad terms.”
Julian Mund, Pensions UK
Ministers have repeatedly stated that they do not envisage using the power, but have steadfastly resisted industry lobbying to remove it or water it down.
Mund said: “Pensions UK strongly supports most of the provisions in the bill, and wishes to see it passed. But the mandation power risks distorting the market, compromising saver outcomes, and eroding trust in the system.
“The current drafting of the provision goes far beyond the scope of the Mansion House Accord and could be used to direct investment in very broad terms, either by this government or a future one.”
Mund added that, if the mandation clause remains, it should be limited in scope to ensure that it “is aligned to the standards set by the [Mansion House Accord], and that it goes no further”.
ABI warns Bell over political risk
Meanwhile, the Association of British Insurers (ABI) has written to pensions minister Torsten Bell warning of significant political risk posed by the mandation clause. Currently, it is set to expire at the end of 2035, while the current parliament will end in summer 2029 at the latest.
Hannah Gurga, director general of the ABI, said in the letter that the clause “creates the risk of shifting priorities from one administration to the next, which is entirely incompatible with long-term investment”.
She continued: “We are concerned about how this power would give future governments the mandate to push policy objectives far from what this government intends…
“The power in the bill goes far beyond the government’s stated policy intent of having a reserve power to address any collective action problem that would impact the delivery of the Mansion House Accord.
“It has very limited constraints on how and under what circumstances the requirements could be introduced, leaving the power open to be used in very different and potentially damaging ways in the future.”
Consumer detriment and the savers’ interest test
Both trade bodies also voiced concern that the mandation clause, as currently worded, risks consumer detriment from underperformance and potential asset bubbles.
The government has promised a “savers’ interest test” for the clause, which would allow schemes to avoid mandation if they can prove it would cause financial detriment.
Hannah Gurga, the ABI’s director general, said in the letter: “As currently drafted, the savers’ interest test lacks the operational detail industry needs to understand how it can be used to prevent material financial detriment to savers.”
Both the ABI and Pensions UK also voiced concern that, if the mandation power was used, it could impede competition and put saver outcomes at risk.
“Decisions on how savers’ hard-earned money should be invested should not be a political choice,” Pensions UK stated.
Safeguards needed to control clause’s scope
The trade bodies have outlined three “critical safeguards” required for the mandation clause to remain in the bill. These included a cap on percentages that can be mandated, in line with the Mansion House Accord, and to bring forward the date at which the clause expires from 2035 to 2032, to reduce political risk.
“Decisions on how savers’ hard-earned money should be invested should not be a political choice.”
Pensions UK
Members of the House of Lords have tabled amendments to the Pension Schemes Bill in connection with these safeguards, according to the latest summary of amendments published on 2 March.
Pensions UK and the ABI also called for a stronger reporting process prior to the mandation power being exercised. It also said it was “vital” that the government “continues to facilitate a pipeline of UK investment opportunities” that pension schemes can access.
Three sittings for the report stage are scheduled for 16, 19 and 23 March. The Pension Schemes Bill will then return to the House of Commons for a final consideration of amendments before receiving Royal Assent.
