The government has taken the step of saying it will reserve powers to direct defined contribution schemes to allocate to private markets via the upcoming pension schemes bill.

The final report of its Pensions Review published on Thursday also confirms plans for £25bn ‘megafunds’ by 2030, though ministers are offering an olive branch to those that are below that level, while backstop powers to force local authorities to join a particular Local Government Pension Scheme pension pool will be brought in, too.

The introduction of powers to mandate investments and pooling marks a step towards a more centrally and top-down regulated industry, as the government seeks to use pension funds as quasi-sovereign wealth funds – ignoring feedback from industry. Pension experts have consistently rejected the notion that investment mandation could be a viable tool, citing the risk of price distortion and the fluid nature of percentage-based targets. 

The final report published today states that the upcoming pension schemes bill will include a reserve power which would, “if necessary”, allow the government to set quantitative baseline targets for pension schemes to invest in “a broader range of private assets, including in the UK”.  

It adds: “The government does not anticipate exercising the power unless it considers that the industry has not delivered the change on its own, following the Mansion House commitments.”  

   

   
The report adds the government “would only intervene in this way having made a thorough assessment of the potential impacts of any proposed quantitative targets on savers and economic growth”, and claims that “any requirements under the reserve power will be consistent with the principles of fiduciary duty”. 

Chancellor Rachel Reeves said: “We’re making pensions work for Britain. These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses – the Plan for Change in action.”  

Along with the Pensions Investment Review, responses to the consultations on DC, on releasing defined benefit surplus and to the ‘Fit for the future’ LGPS consultation.

The powers to mandate private market investment for DC will rattle the sector, whose investments are coming under greater scrutiny. The Pensions Regulator and the Financial Conduct Authority will launch a joint market-wide data collection exercise later this year, which will include asset allocation information in DC schemes. The exercise will be run annually until the new value for money disclosure data becomes available. The first reporting will be available in early 2026.

Plans to make multi-employer defined contribution default funds reach a size of at least £25bn by 2030 have been softened somewhat – schemes worth over £10bn that are unable to reach the minimum size requirement by the end of the decade “will be allowed to continue operating, as long as they can demonstrate a clear plan to reach £25bn by 2035”.  

The government also plans to legislate for in-house investment experts in DC schemes that want to extend their timeline, saying: “We will require there to be suitably qualified investment expertise in-house as well as strong governance.” 

 

In a nod to the risk that innovation could be stifled, collective DC schemes will be exempt from the size requirement, and there will be a pathway for new market entrants.  

Intentions for a contractual override to allow contract-based schemes to consolidate have also been confirmed, with a new safeguard through an independent third-party assessment. 

The government has, however, stepped back from its proposal to abolish differential pricing, citing the risk of unintended consequences, and is also refraining from putting a duty on employers to review pension arrangements periodically. 

Changes for the LGPS pooling landscape have already become public before the consultation response, though size appears to be a second-order issue for this, despite the rhetoric. Two large pools, Brunel and Access, are being targeted for consolidation that happen to be in non-Labour voting regions, a fact that has been privately pointed out by some familiar with the sector.  

Central government does not currently have any concrete legal handle to tell local authority funds where to pool, but the pension schemes bill will introduce a backstop power for government to direct an administering authority to participate in a specific investment pool. In addition, local investment targets will be agreed with LGPS authorities, worth £27.5bn according to the government. 

Pensions minister Torsten Bell said: “Our economic strategy is about delivering real change, not tinkering around the edges. When it comes to pensions, size matters, so our plans will double the number of £25bn plus megafunds. These reforms will mean bigger, better pension schemes, delivering a better retirement for millions and high investment in Britain.”    

The response on options for DB schemes confirmed that the pension schemes bill will legislate for releasing surplus. The government said it will introduce a statutory resolution power for trustees to modify their scheme rules, and set the threshold for surplus release at a ‘low dependency’ funding level, a measure introduced with the DB code that typically sits between solvency and technical provisions. There will be a consultation on draft regulations and the Pensions Regulator will produce guidance, but for now the government stressed that "extraction of surplus will remain subject to trustee discretion and actuarial certification".  

Calls for a 100% Pension Protection Fund underpin for surplus extraction have been roundly rejected. Meanwhile, proposals to create a public sector consolidator under the PPF, first launched under the previous government, will not be included in the forthcoming bill, with the government saying it wants more time to consider this.  

The chair of the Association of Professional Pension Trustees, Rachel Croft, suggested that fiduciary duty takes priority.   

  

“As trustees, our primary duty is to ensure we deliver the best outcomes for members. While we know government is keen to develop larger pools of capital for UK-specific investment, our focus will always be on what actually provides the best risk-managed returns for our members,” Croft said. “This means that trustees will invest wherever they can get the best risk-adjusted rate of return, with sufficient liquidity, to meet the specific investment objectives of the scheme. In short, if suitable investible UK assets are available which meet these criteria, trustees will invest in them; if this is not the case then this will prove much more difficult.” 

 

Fiduciary duty was also emphasised by Barnett Waddingham partner Martin Willis, who said that “while scale can bring benefits like investment access, efficiency and improved governance, it’s not a silver bullet”. 

 

Willis argued that many smaller, well run schemes already deliver strong outcomes. “Forcing consolidation risks losing that added value. Instead, the government should focus on removing the real barriers – such as legacy guarantees – while offering practical support, including indemnities for schemes that want to consolidate but face structural and legacy hurdles,” he said. "Supporting UK growth is a worthwhile goal, but fiduciary duty must remain at the heart of any reform. Bigger isn’t always better – it’s outcomes that matter most.”  

 

The Association of Consulting Actuaries is supportive of consolidation if it is “done right” and predicts the requirements on defined contribution schemes will change the market. 

 

“The announcements on scale tests, and the timeframe for meeting the tests, will bring a sharp focus to providers – and not all will survive. We view as positive that there will still be a route for innovators to enter the market,” said ACA DC Committee chair Tess Page. 

  

Page added: “We consider the proposed government review in 2029 of the impact of the [value for money] framework, contractual override provisions, and other reforms will be helpful in testing whether the best outcomes for members are being achieved and adapting the roadmap of change if necessary.” 

 

Larger DC providers like the People’s Pension welcomed the Treasury’s push for fewer, larger schemes. Smaller master trusts such as Smart Pension expressed relief to be given extra time to reach £25bn. 

 

On DB, industry welcomed the commitment to allow surplus extraction. 

  

“These proposals mark a significant shift in DB scheme regulation,” said Isio director Iain McLellan. 

“Trustees have generally been positive but have consistently raised the importance of clear guidance being provided to support their decision making on using any surplus. So far, the Pensions Regulator appears keen to engage with explicit reference in its recent Annual Funding Statement that it views schemes having a surplus policy in place as best practice.” 

 

How do you feel about the ‘reserve power’ to mandate DC investment in private assets?