With the Pension Schemes Bill returning to the House of Commons this week, Wedlake Bell partner Paul Ashcroft explores the potential impact of a revised mandation clause.
On 19 March, the House of Lords voted to remove the mandation power (also referred to as the “reserve power”) from the Pension Schemes Bill in response to industry criticism.
As originally drafted, the power would give the government broad authority to direct how workplace pension schemes are invested. While the government has characterised the power as a safeguarding mechanism, intended to protect against a collective failure to implement the Mansion House Accord, the House of Lords considered it to be a step too far.
If the government had wide statutory powers to direct pension scheme investment, this would risk substituting professional judgement with political judgement around investment decisions. There is also concern that such powers could undermine trustees’ fiduciary duties to act in members’ best interests.
“As with all trustee decision-making, robust governance, proper advice and a clear audit trail will remain critical.”
Paul Ashcroft, Wedlake Bell
A key criticism of the mandation power as currently drafted under the bill is the absence of clear parameters around the exercise of the power. It is now anticipated that the government will propose to limit the mandation power to more closely align with the Mansion House Accord.
The accord represents a voluntary commitment from 17 of the UK’s largest defined contribution (DC) pension providers to invest 10% of their default funds in private markets, with at least half of that in UK markets, by 2030.
Would a revised mandation power still expose DC scheme trustees to claims from members?
For trustees to be in breach of their fiduciary duties, members would need to establish that the trustees had failed to act in their best interests. It would be a high bar to satisfy where trustees of a well-run scheme are simply complying with the minimum requirements of a statutory obligation.
As with all trustee decision-making, robust governance, proper advice and a clear audit trail will remain critical.
Is there a risk that the mandation power could compel schemes to invest in more volatile UK-focused investments? Potentially, yes. However, if a revised mandation power is more closely aligned to the Mansion House Accord, limiting UK investment exposure to at least 5% of default funds by 2030, then hopefully any associated risk should be capable of being managed as part of a diversified investment strategy, affecting only a relatively small portion of the overall fund, subject to schemes receiving proper advice.
The Pension Schemes Bill returns to the House of Commons on 15 April, when the Lords’ amendments to the mandation power will be considered. While the pensions industry awaits the revised wording with interest, the prospect of a compromise to the power provides cautious grounds for optimism.
Paul Ashcroft is a partner at Wedlake Bell.
