Last night, the two houses of parliament finally agreed on the pension schemes bill. The contested clause on government investment mandation has not been removed but substantially altered, with trustees now able to ask for an exemption based on members’ interests. In addition, listed investment trusts are no longer excluded and the power cannot be used before 2028.  

The government has given in to the demands by the House of Lords in substance if not in form. The compromise allows the pensions minister to avoid losing face by backing down entirely, after defending the issue so forcefully, but the clause retains little of its former power. 

The last changes made to the reserve power to mandate that defined contribution schemes must invest in private markets – an area of the markets currently receiving considerable scrutiny and negative headlines – saw Torsten Bell pull most of the teeth of the clause. 

Perhaps most importantly, trustees can now ask to be exempt from mandation if the relevant investments are “likely not to be in the best interests of members”. This marks a shift towards normal trustee fiduciary duty and away from having to prove “material financial detriment”, seen by peers as too high a bar.  

A further change means listed closed-ended companies are no longer specifically excluded from the type of investments that qualify in the government’s view. It means DC schemes will not have to invest in the six asset classes named in the Mansion House Accord through direct holdings or open-ended funds, some of which have recently been gated. 

A new requirement on the Pensions Regulator and the Financial Conduct Authority to make an assessment of barriers to the delivery of private asset investment, including the extent to which those barriers reflect the collective action problem, will add further guardrails, as that assessment must not only be incorporated into the report the secretary of state must produce before using the reserve power, but it also places a duty on the government to ‘have regard’ to the regulatory assessment before any use of the power.  

In addition, the bill will state that the power must not be used before 2028, with the minister arguing that “it was always the government’s intention to evaluate progress against the Mansion House Accord commitments in terms of the broad direction of travel over a substantial period of time, rather than looking at short-term movements in private asset exposure”.  

Those peers fighting against mandation welcomed these changes. Baroness Sharon Bowles, whose amendment called for removing the mandation clause, said: “I am still no fan of mandation, but we have now got it suitably under control, if I can put it that way. There are reasonable guardrails to make sure that it does not go wrong, that we, I hope, never use it and that we get the additional investments that we all agree in principle are needed.”  

Baroness Ros Altmann said: “We have now achieved much safer and better outcomes for members of pension schemes. These will allow trustees and managers to look after the best interests of members so that they do not feel forced to invest in ways that they might not otherwise have chosen to or which are against their best judgment.” 

Last Thursday, she told mallowstreet that the bill could pass if the government were to base the exemption test on fiduciary duty and include closed-ended investment trusts in the qualifying vehicles. However, it took a further round of fruitless ping pong before ministers – a day before parliament rises today – finally agreed to move on these points.

Whether this will make the mandation power de facto meaningless will depend on how the fiduciary duty carve-out is constructed, said senior knowledge lawyer at Norton Rose Fulbright, Elaine Hiles. 

 

“In theory, the government could retain some bite through drafting, for example by requiring regulatory approval before trustees can rely on their fiduciary duty to disapply mandation,” she said. “It also leaves us with an obvious question: if the effective constraint on mandation is simply the fiduciary duty and members’ interests, why have the mandation power at all?” 

The broader pensions industry has expressed relief at the passing of the bill after a protracted ping pong, and at fiduciary duty having prevailed. 

Changing the exemption test for mandation is “a victory for fiduciary duty and, ultimately, for savers whose investments will remain governed solely by trustees”, said Pensions UK. 

 

CEO Julian Mund said the association will now turn its attention to the regulations that will put these reforms into action. Suggesting that further reforms need to follow the sweeping changes around governance, DC market and investments, he added that the group will look to work “with the Pensions Commission so that the systemic change delivered by the bill is accompanied by more savings overall”. 

 

The Pensions Commission is expected to produce its interim report after the upcoming devolved and local elections on 7 May.  

 

The Association of British Insurers, which represents FCA-regulated providers, remains concerned the bill includes a reserve power to mandate how schemes invest but feels the additional safeguards should help limit any potential negative impact.

“In particular, the concessions now reflect our calls for an independent assessment before the power can be used. We'll now work closely with our members as they start implementing the wide-ranging measures introduced through this landmark legislation," said Yvonne Braun, the ABI’s director of long-term savings policy. 

 

There are no illusions as to the amount of work that lies ahead in the form of consultations on the raft of secondary legislation that will implement the provisions in the bill. 

Helen Forrest Hall, chief strategy officer at the Pensions Management Institute, said: “As the bill now moves towards implementation, our focus will be on working with government, regulators and the industry to ensure these reforms strengthen the pensions system, support long-term growth and, above all, deliver better outcomes for scheme members.”  

 

Trustees meanwhile are somewhat reassured that fiduciary duty has been written into the mandation clause but still believe it should never have been introduced.  

 

“The core principle of effective trusteeship is the ability to act in the best interests of their members, consistent with their fiduciary duties. Mandation flies directly in the face of this,” said Louise Davey, head of policy and external affairs at trustee firm Independent Governance Group. 

 

“We’re pleased to see that the government has backed down and significantly reduced its proposal; however, it still has clear remnants of a mandation-led approach, which has no place in a healthy and fully functioning pension ecosystem,” she argued. 

  

Master trusts will be especially impacted not just by the threat of mandation but by many of the other provisions in the bill, from scale, to value for money and default pension solutions.  

Patrick Heath‑Lay, chief executive of People’s Partnership, said: “These reforms are only the beginning, and the needs of savers must be kept firmly at the heart of this evolving process to future-proof retirement saving. We look forward to working constructively with government, regulators and alongside the industry to ensure the measures are implemented in a way that builds on the success of automatic enrolment and delivers meaningful long‑term benefits for savers.”