UK ministers gain power to force pension funds to invest in British companies

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Chancellor Rachel Reeves on Tuesday finally won her battle with the House of Lords over legislation that will give ministers the power to force pension funds to invest a minimum amount in UK companies and private assets.

But parliament’s upper house only agreed to approve the pension schemes bill after ministers made a series of last-minute concessions that put safeguards around any use of the controversial “mandation” power.

Reeves insisted that ministers be given a “backstop” power to ensure that pension funds comply with a voluntary accord to put billions of pounds of extra investment into the UK economy.

Conservative and Liberal Democrat peers repeatedly rejected the plan in the Lords, arguing the measure was “coercive” and detrimental to savers’ interests.

After days of “ping pong” between the Lords and Commons over the pension schemes bill, Treasury minister Torsten Bell on Tuesday night unveiled fresh concessions that broke the deadlock.

Bell said the mandation power would now be “capped, time-limited . . . and subject to a savers’ interest test that has been materially strengthened”.

The contentious power will expire via a so-called sunset clause in 2032, while pension funds will be able to appeal if they feel ministers are telling them to invest in a way that is “likely not to be in the best interests of [scheme] members”, Bell added.

One new concession will require regulators to make an assessment of any ministerial direction to pension funds and that ministers would have to take account of their judgments.

Bell had already issued a clause to prevent ministers from mandating investment in any particular asset class.

The latest round of concessions was described as “a decent compromise” by Baroness Sharon Bowles, a Lib Dem peer and opponent of the mandation power.

The Conservatives also agreed to drop their opposition, meaning that the pension schemes bill is heading for the statute book and that parliament will come to the end of its current legislative session on Wednesday.

Helen Whately, shadow pensions secretary, said the government had made “a flurry [of] concessions — watering down mandation to a vestige of the original power”.

While welcoming the government’s “U-turn”, Whately pledged that a future Tory government would repeal the mandation power.

Last May, ministers co-ordinated a voluntary accord at London’s Mansion House with 17 of the UK’s largest pension providers for them to invest at least 10 per cent of their assets in private markets by the end of the decade. 

But the government also set out contentious “backstop” plans to force pension funds to invest in private assets if they failed to meet the targets contained in the Mansion House agreement.

Under the bill, ministers would be able to force pension funds to invest 10 per cent of their assets in private markets, at least half of which would be invested in the UK.

The Treasury has argued that the reserve power is vital to ensure that the whole industry follows through on the Mansion House accord, removing the possibility of some funds holding back to gain a competitive advantage.

The fact that UK pension schemes might be forced to invest in assets that may not perform well in the short term is a fiduciary concern for those in the industry opposed to mandation. 

Even so, sector figures did not want to see the whole of the pension schemes bill fail, saying it contains a wider set of beneficial reforms for savers.

Jamie Jenkins, policy director at pensions provider Royal London, said the government appeared to have come up with a “pragmatic solution to the apparent impasse” in the Lords.

“It would have been a mistake to sacrifice the other substantial measures in the bill over this single point of contention,” he added.

Bell has said that the government will remain neutral and not directly interfere with the asset allocation decisions of pension funds. 

But how this neutrality is defined is a key issue, said Steve Webb, a partner at pension consultants LCP and a former pensions minister.

A government spokesperson said mandation was an “important part” of its plan “to reform workplace pensions to give people a more secure retirement”.

“We agree with the industry that delivering this bill is crucial and we are committed to doing so,” they added.