£400 billion in DC savings is a tempting target for a government struggling to fund its preferred causes and achieve economic growth, so the reserve power in the Pensions Bill may be a double-edged sword for private markets.
A political row over the government’s Pension Schemes Bill has exposed a deeper divide over who should ultimately control the investment of Britain’s defined contribution (DC) pension savings.
At the centre of the dispute is a controversial provision in the bill – often referred to as the mandation clause – which would give ministers the power to require DC pension schemes to allocate a portion of their default funds to specified investments. While the government insists the power is merely a safeguard to support voluntary industry commitments, critics warn it could mark a significant shift towards politically directed pension investment.
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Speaking at the Pensions UK Investment Conference this week, pensions minister Torsten Bell sought to reassure investors that the power would not be used broadly. Instead, he framed it as a narrow mechanism designed to underpin the Mansion House Accord, the industry commitment by major providers to allocate capital to UK and global private markets.
“The only purpose of the reserve power in the Pension Schemes Bill is to backstop the Accord goals… and nothing else,” Bell said. “You’ve got total clarification.”
The government’s broader strategy rests on encouraging larger pension schemes to invest in a wider range of “productive assets”, including infrastructure, housing and venture capital. Bell argued that diversification into these areas should ultimately support stronger long-term returns for savers while helping to address Britain’s long-standing investment gap.
Under the Accord, signatories have pledged to allocate 10% of assets to private markets by the end of the decade, including 5% to UK investments. Ministers have simultaneously sought to increase the supply of investable projects through infrastructure planning reforms and investment initiatives.
But the inclusion of a statutory power to mandate investments has sparked strong opposition from the Conservative Party, which argues the clause crosses a fundamental line. Shadow pensions minister Helen Whately described the proposal as a “tectonic shift” in the relationship between government and pension schemes.
For two decades, she said, the UK’s DC system has rested on a clear principle: trustees allocate capital in members’ best financial interests, within a regulatory framework set by government. Mandating investment would change that balance fundamentally.
“Defined contribution pensions are now too big for Labour politicians to ignore, more than £400 billion… and that kind of money attracts attention from the Treasury,” Whately told delegates.
“This is a shift from government shaping incentives to influence investment to government directing allocation – from regulatory architecture to portfolio prescription.”
Whately warned that once such a power exists, political pressure to use it will inevitably grow. She noted that the clause neither limits the percentage of assets covered nor where capital can be directed. Once the power exists, she warned, “expectations change”.
Carol Young, CEO of the USS and Pensions UK board member, noted that the clause means “crossing the Rubicon” and future pensions ministers from any party will enjoy the statutory power. Bell only offered the reassurance that the electorate was responsible for “making sure that bad people don’t turn up and do bad things”.
The key concern is that the current and future governments could use the power to channel pension savings into politically favoured sectors regardless of whether those investments represent the best risk-return opportunities for savers.
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Bell mentioned only a few sectors in the government’s investment pipeline, all relating to net zero and social housing, which are not wholly shared across the political divide: “That is why this government is approving the solar farms, the reservoirs, the grid extensions, the nuclear power stations and the housing projects that our country badly needs.”
That risk raises deeper questions for the pensions industry. If multiple schemes are required to invest in the same sectors or asset classes, the resulting inflows of capital could distort markets and compress returns. Trustees could face a difficult dilemma between following ministerial direction and fulfilling their fiduciary duty to act in members’ interests.
Whately argues that the provision therefore risks undermining one of the central principles of the UK pension system: that retirement savings belong to savers, not the state.
The debate also carries significant implications for the private markets sector. Mandation could dramatically increase UK institutional investment into certain asset classes. Yet a wave of new capital competing for a limited number of assets could have significant implications for returns. It could ultimately damage the reputation of private markets if allocations come to be seen as vehicles for government policy rather than competitive investments.
“Forcing funds into politically chosen sectors doesn’t fix the underlying problem,” said Whately. “Mandation means that a government is less likely to do the hard yards, to fix the reasons why pension funds are choosing not to invest in the UK.”
Ministers insist this is not their intention. Bell emphasised that government policy is focused on creating a stronger pipeline of investable projects and enabling pension schemes to allocate capital voluntarily.
Nonetheless, he highlighted the “huge” amount the government was “spending” on pensions tax relief and that the recipients were “dominated by high earners”, implying a moral obligation. “You should want a government that keeps tax reliefs under review,” he added.
With the Pension Schemes Bill progressing through Parliament, soon to be in the report stage in the House of Lords, the dispute highlights a fundamental tension in UK pensions policy.
On one side sits a government eager to mobilise the country’s vast pool of retirement savings to support economic growth. On the other stand critics who fear that once political control enters the investment process, the independence of pension capital – and potentially the returns of millions of savers – could be at risk.