Concerns around the potential for the government to mandate pension investments have continued, with industry experts warning that details within the Pension Schemes Bill could be seen as "introducing mandation by the back door”.

The government published the Pension Schemes Bill yesterday (5 June), with industry experts suggesting that the package of reforms included in the bill represent a "once in a generation opportunity to address unfinished business in the UK pension system”.

However, industry experts have raised concerns around the inclusion of a reserve power that would allow the government to set binding asset allocations.

Whilst stopping short of mandating pension investments, Broadstone head of DC workplace savings, Damon Hopkins, argued that the government had introduced a backstop law to "firmly twist" the pension industry's arm towards what it perceives as sufficient allocations to UK assets and infrastructure.

Isio director, Iain McLellan, also warned that "the industry will feel a cold chill down its spine at the introduction of a reserve power for the government to mandate pension investments".

"Even if it’s never invoked, its mere existence will give government significant leverage over pension providers," he stated.

UK Sustainable Finance Association (UKSIF) head of policy and regulatory affairs, Oscar Warwick Thompson, shared these concerns, warning that "the spectre of ‘mandation’ still looms over this bill", which could risk distorting markets, creating asset bubbles in some areas of the economy, and potentially lowering returns for pension savers.

Instead, Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy, Zoe Alexander, argued that "the best way of ensuring good returns for members is for investments to be undertaken on a voluntary, not a mandatory basis".

Given this, she warned that these powers will require "scrutiny".

And this is expected to be seen as the bill continues its journey through parliament, as Herbert Smith Freehills Kramer pensions partner, Rachel Pinto, says that the industry should "expect friction as the bill passes through parliament".

"The conditions and safeguards around the proposed power will be crucial," she continued, agreeing that "the possible sting in the bill's tale is mandation".

However, Pensions Minsiter, Torsten Bell, previously told Pensions Age that he is “not anticipating using” the backstop power, stating that he was “confident” the government would not need to mandate.

Bell also reiterated this when speaking to the press shortly after the bill was published, as he confirmed: "I'm not envisioning using it at all."

He also refuted the claim that many in the industry were concerned about the risk of mandating in the Pension Schemes Bill, stating that his anecdotal experience with industry representatives had been supportive, "because everybody knows what the direction of travel is".

Asked why the power was introduced if there is no intent to use it, Bell suggested that the government was looking to provide certainty that the industry as a whole is moving in a particular direction.

"The industry has collectively said that it wants to move in a certain direction. In practice, is already moving in that direction because that is what's in the interest of savers, and that's what we see around the rest of the world as well," he explained.

"But the industry itself has also said to us there's something of a collective action problem at times, and so the certainty that the whole industry is moving, rather than some providers sticking with the status quo that sees employers too focus just on one metric in terms of costs and charges, is important."

However, industry experts have raised further concerns as the detail of the bill has been scrutinised, with Eversheds Sutherland partner and head of defined contribution (DC), Michael Jones, arguing that some elements of the bill could be seen as "introducing mandation by the back door".

He stated: “As expected, the bill will require commercial DC master trusts/providers to have at least one “main scale default arrangement” of at least £25bn by 2030, or by 2035 if they can show credible progress towards this target by 2030.

"However, in a surprise move, the bill will also require all main scale default arrangement to be approved by the relevant regulator (Financial Conduct Authority or The Pensions Regulator).

"Critically - as part of this approval process - the relevant regulator may approve a relevant master trust or group personal pension plan only if it determines that the scheme holds at least the prescribed percentage of “qualifying assets” in in its funds – these are productive finance assets (e.g. private equity, private debt, venture capital, property) which may include assets located in the UK.

“Through these measures, it appears the regulators will have power to apply an “asset allocation test” in deciding whether to approve a main scale default arrangement."

Jones argued that "this is at odds with the government’s Final Report and would be a major step for the government to take, introducing mandation by the back door for commercial DC providers and schemes and shifting the voluntary commitments of the Mansion House Accord to a regulator-led condition for approval".

Given this, he stressed the need for the government to clarify how it sees this new requirement operating and how this measure squares with the final report published last week.

Further detail of the bill has also provided some reassurance, however, as Isio head of DC investment, Helyne Slade, pointed out that, one "notable" addition in the bill was the time-limited nature of powers to mandate investment in specific asset classes, which is not extendable after 31 December 2035 - potentially limiting future government influence over asset allocation.

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