The government has included a controversial ‘backstop’ power in the Pension Schemes Bill to allow it to mandate specific asset allocations - but the pensions minister is adamant that there is no intention to use it.
The bill, published yesterday (5 June), includes a provision to allow for asset allocation to be mandated. Examples of asset classes include private equity, private debt, venture capital and “interests in land”, and the bill says any rule “may for example relate to” an asset’s location in or economic impact on the UK.
In its final report from the Pensions Investment Review, the government indicated that the Mansion House Accord and similar initiatives had convinced policymakers that it was “not necessary currently to mandate investment” in UK private markets, a key focus of the government’s growth agenda.
However, the report also made clear that the government wanted to reserve the power to force investments if its goals were not being met.
Torsten Bell: Addressing the ‘collective action problem’
Torsten Bell, the pensions minister, has repeatedly stated that he does not anticipate having to use the power.
Speaking to journalists yesterday, he said: “The industry collectively has said it wants to move in a certain direction, and in practice it is already moving in that direction because that’s what’s in the interest of savers, and that’s what we see around the rest of the world as well…
“I think the industry has done a good job in setting out what it thinks is in the best interests of their members, and the schemes that have signed up to the Mansion House Accord are doing that.
“Lots of them want to go beyond the baseline metrics that have been set, but that’s for individual schemes to decide.
“This is about very broad asset classes, and different schemes will make different choices about what that means for them.”
However, he also said that industry representatives had warned of a “collective action problem” when it came to making impactful investments.
“It is important that people see that the new world is happening,” Bell said. “They have certainty that that’s where they’re heading towards. The Mansion House Accord is the voluntary agreement that is providing them with that certainty.
“[We are] just underwriting that and saying there isn’t a collective action problem. Change is going to happen. Everyone has certainty that change is coming, because that’s what savers deserve and need.”
The minister also claimed that “not a single person” he had spoken to was opposed to the government’s “direction of travel”, to create “bigger, better pension schemes investing in a wider range of diverse assets”.
Section 28C and asset allocation ‘approvals’
In the Pension Schemes Bill, section 28C - titled “Approvals in respect of asset allocation” - sets out details of how the backstop power may work.
Importantly, it also includes a ‘sunset’ clause of 31 December 2035, something the Pensions and Lifetime Savings Association (PLSA) had specifically called for. If the mandation power has not been exercised before this date, it will expire, the bill states.
Lydia Fearn, co-head of consolidation at LCP, said this was “a notable addition” to the bill as it “potentially limit[s] future government influence over asset allocation”.
However, the PLSA said that while the limitation was “positive”, the clause still needed “very close scrutiny”.
“The PLSA is particularly concerned that the sunset clause extends beyond the current parliament, for example, and contains very broad discretions for the Secretary of State to direct investments or set targets,” the trade body stated.
It argued that existing fiduciary duty requirements had “worked well to ensure savers’ interests are protected” and did not prevent pension schemes and providers from investing substantially in the UK.
To increase domestic investment, the PLSA said the “best route” was through collaboration between the pensions industry and the government on voluntary initiatives to invest “in a way that is consistent with member interest”.
“That was the objective of the Mansion House Accord – and PLSA is hopeful that, as the industry delivers on that, government will see no need to exercise this power,” the PLSA said.
Backstop needs ‘urgent clarification’, says lawyer
Michael Jones, partner and head of defined contribution (DC) at Eversheds Sutherland, highlighted that the bill contains wording that implies an asset allocation test will be part of regulatory approvals for all DC megafunds – including a potential UK allocation requirement.
“Through these measures, it appears the regulators will have power to apply an ‘asset allocation test’ in deciding whether to approve a main scale default arrangement,” Jones said.
“This is at odds with the government’s final report and would be a major step for the government to take, introducing mandation by the back door for commercial DC providers and schemes and shifting the voluntary commitments of the Mansion House Accord to a regulator-led condition for approval.
“Therefore, it is essential the government clarifies how it sees this new requirement operating and how this measure squares with the final report published last week and its statement that it does not anticipate setting minimum asset allocation thresholds for the time being.”
Government ‘twisting the industry’s arm’ on UK allocations
Other industry commentators have also raised concerns about mandation.
James Carter, head of platform policy at Fidelity International, said: “Directing investment allocations risks not maintaining a primary focus on pension members’ outcomes… We continue to believe that pension schemes must be allowed to direct pension assets in members’ best interests, without a mandatory requirement to invest in specific markets or assets.
“While the government acknowledges progress being made by industry to invest in productive finance assets, the reservation of a power to direct pension scheme investments in the future remains a concern.”
“There continues to be a potential conflict, particularly if mandated, between a pension scheme’s fiduciary responsibility to maximise savers’ retirement outcomes and the advantages to the UK economy.”
Damon Hopkins, Broadstone
Damon Hopkins, head of DC workplace savings at Broadstone, added that the government was seeking to “twist the pension industry’s arm” on UK investment.
“There continues to be a potential conflict, particularly if mandated, between a pension scheme’s fiduciary responsibility to maximise savers’ retirement outcomes and the advantages to the UK economy,” Hopkins said.
“While billions of pounds of investment into the UK economy will have obvious advantages, UK pension savers are inherently exposed to risks in the UK economy in their day-to-day lives so increasing this risk may not be optimal, nor is it guaranteed that the returns yielded will be better than those on offer globally.”
Editor’s notes: Backstop power is a sword of Damocles for the pensions sector
The government plans to give itself powers in the Pension Schemes Bill to intervene in scheme asset allocation and LGPS fund mergers. We should probably be worried, writes Pensions Expert editor Nick Reeve.
