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A contentious change in UK legislation is not consistent with what ministers had promised and could harm the retirement outcomes of millions of savers, some pension experts have warned.
The pension schemes bill, expected to become law next year, proposes to give regulators a power to force defined contribution (DC) schemes to invest a minimum amount in private markets.
“The provision isn’t framed as a reserve power and doesn’t promise that there won’t be detriment to pension savers,” said Charles Randell, former chair of the Financial Conduct Authority.
“This is a pity, given the case for the intervention doesn’t seem to be very convincing in the first place. I worry that this could undermine trust in pension saving.”
The power comes alongside a new rule that workplace DC schemes must have at least £25bn of assets in their default funds by 2030, or 2035 provided they can show credible plans to reach the threshold in five years’ time.
Some experts warn that the move to give the power to regulators could force pension funds to invest in line with the voluntary Mansion House Accord.
Under the accord, 17 of the UK’s largest DC workplace pension providers pledged to invest at least 5 per cent of their assets in UK private markets by 2030, provided the assets were sufficiently attractive.
Zoe Alexander, director of policy at the Pensions and Lifetime Savings Association trade group, said the drafting of the power to apply an asset allocation test in the bill “could see the voluntary commitments of the Mansion House Accord become a regulator-led condition for approval”.
“The government has previously said it intends to keep any mandation power in reserve, and so this drafting has caused concern,” Alexander said, adding that state intervention in investment decisions “could erode trust and potentially lead to poorer returns”.
The move is part of the government’s wider reforms designed to consolidate Britain’s fragmented system and kick-start growth by encouraging more domestic investment by UK funds.
The pension regulator has also said it is actively encouraging schemes to adopt long-term investment strategies that support both member outcomes and national growth.
The power to set asset allocation targets comes with a sunset clause of December 2035, when the default fund £25bn threshold must be met, after which the power will expire if not used already.
The government has insisted that a push to make more DC workplace funds invest more in private markets would improve saver outcomes, but research from its own actuarial department shows only slight outperformance of portfolios with private market holdings.
A person close to Treasury’s thinking said the power to mandate asset allocation was not expected to be used automatically alongside the approval for default funds reaching £25bn.
They said the department was aware of concerns that the clauses in the bill were “insufficiently clear” on this point and would amend them if necessary.
The Treasury said the power to set asset allocation targets was “there as a backstop” and added “we do not expect to have to use it because we’re confident that schemes are now moving in the right direction, towards a greater focus on diversification and investment returns for savers”.