The House of Lords on Wednesday rejected a new, reduced version of the reserve mandation power. One peer has suggested the bill could pass if two sticking points are addressed. The houses have, however, reached a compromise on scale exemptions and public service pensions. The bill will return to the Commons on Monday.

On Wednesday, the upper house welcomed government concessions around scale exemptions and the accounting of unfunded public service pensions, but decided to test mandation, with 234 voting for a motion by Baroness Sharon Bowles and 152 voting with the government.  

The government’s minister in the Lords, Baroness Maeve Sherlock, citing the Mansion House Compact where most signatories did not reach the pledged investments, said: “We have been here before; it has been tried on a voluntary measure and failed, and industry identified this as the single biggest barrier. That is why we are addressing this and that is the reason for doing it.”  

However, peers were firm in their view that mandation, even in reduced form, sets a dangerous precedent. 

Baroness Sharon Bowles said the mandation power “was sold as a backstop to the [Mansion House Accord], so it is not a case for celebration when something that bit off a lot more than the accord is brought a bit more closely into alignment with it. The fact is that the reserve power is coercive—that is what it is there for and what it is meant to do. It is not without effect, yet it was not consulted on. It was sprung on us suddenly and snuck into the bill, and we have had to deal with it.”  

Peers are concerned that to be exempt from mandation, trustees would have to show not just that they are acting in members’ interests, but that investing in the mandated assets would cause “material financial detriment” to members, “which is much too high a bar”, Baroness Ros Altmann told mallowstreet.   

The exclusion of closed-ended investment trusts and companies is another point she raised as a key issue. 

 

The government needs to do two things, Baroness Altmann suggested: make the power subject to fiduciary duty, “so that it is clear [that] if trustees believe buying the chosen assets by 2030 is not sensible, they can decide not to do so”; and ensure that pension funds are allowed to invest in closed-ended investment trusts or REITs if they hold the government's intended assets. 

  

“If these two flaws are addressed, then the bill can pass in my view,” she said. 

‘An extraordinary hill to choose to die on’ 

Earlier in the day, pensions minister Torsten Bell had given more ground. The MP for Swansea West proposed that the temporary mandation power would end not in 2035 but in 2032, as has been called for by Pensions UK. In addition, “because the power only has one purpose”, the bill would state that mandation can only be used once, said Bell.  

“Third, and I want the House to understand the significance of this, we are providing not just for the power but any effects of it to fully fall away at the end of 2035,” he continued. “It means that even if the power has been used, the entire framework and any requirements on schemes fall away at the end of 2035.”  

In addition, the bill would not refer to assets held in ‘default funds’ but mirror the wording in the Mansion House Accord which refers to ‘main’ defaults – something the shadow pensions minister had highlighted last week.  

Shadow pensions minister Helen Whately warned that even if it is intended to cease in 2035, “once this power is on the statute book, amending it, for instance to extend these dates, is a whole lot easier than if you had never crossed this Rubicon”, adding that “if something is wrong in principle, it does not become right in smaller doses”.  

She also argued that Bell had created fear in the industry that the wide-ranging bill may fall. If agreement cannot be reached between the Commons and the upper house, the bill cannot continue. A bill normally has to pass all stages in a single parliamentary session – about a year – but can be carried over into the next session.  

“This is an extraordinary hill for the minister to choose to die on. Mandation was never put to voters, never had the backing of industry and should not be forced through parliament now,” she concluded, urging Bell to think again.  

A government spokesperson said: “The pension scheme bill will drive better outcomes for pension savers, including by backstopping the industry-led Mansion House Accord, under which major providers have committed to invest 10% in private markets and 5% in the UK by 2030. It is an important part of the government’s plans 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.”  

However, the Lords did not challenge the government’s compromises on scale exemptions. This means regulations around scale measures and default arrangement now “must have regard to the importance of competition and innovation” alongside effective governance, according to Bell.  

Although Bell disagreed with another Lords amendment on scale that would give regulators the power to exempt schemes, calling them “unworkable”, he made a bid to reassure the upper house by proposing that the government publish a report within 12 months “about the effect of pension scheme consolidation and the extent to which innovative product designs are adopted or maintained following consolidation activity, as well as any barriers that may exist to preserving those features”, so that any action considered necessary could be taken before 2030, when the scale requirement will start to apply.  

Peers also wanted the government to be more transparent about the costs of unfunded public service pensions and had demanded a review.  

Under the government’s new compromise, the Government Actuary must produce a report within 12 months “that sets out their analysis of the long-term impact of public sector pensions, covering both expenditure on benefits and income from member contributions”. The analysis will have to be sent to the Treasury and the Office for Budget Responsibility, and the Treasury must make it available to parliament.  

Labour’s Lord Bryn Davies – one of the few speaking in favour of mandation earlier – urged the government to ensure that GAD’s report would not just include cash figures but put them into context by reference to GDP.  

During the debate, Labour MP Liam Byrne asked Bell whether trustees would be given statutory guidance on fiduciary duty now – something the Lords had unexpectedly blocked earlier this month after a working group was already installed. 

Bell replied that work on fiduciary duty guidance is proceeding and will be put on a statutory footing “in the months and years ahead”. mallowstreet understands that because the government amendment to bring in statutory guidance was introduced in the Lords, their rejection cannot be considered in the House of Commons – meaning the legislation to issue guidance either has to wait for a future bill or might not be introduced.