The UK government is planning to reserve an option to mandate private markets investment from UK pension funds in the upcoming Pensions Schemes Bill, according to an update today.
The plan is included in the government’s final report on the Pensions Investment Review, which is expected to shape the keenly anticipated pension reform legislation. Published today alongside two consultation responses, including one on defined benefit surpluses, the update also confirms ambitions regarding consolidation in the defined contribution (DC) market and ensuring that all workers are enrolled in a pension scheme that provides good value for money.
In the Pensions Investment Reivew report, the government said it has been “strongly encouraged” by the recently launched Mansion House Accord, a voluntary commitment by 17 of the largest defined contribution (DC) pension providers to invest 10% of their default funds in private markets, including 5% in the UK specifically.
The government noted that it is also encouraged that several providers have expressed ambitions to go further.
It said it was currently therefore not necessary to mandate investment. However, it said the upcoming Pension Schemes Bill will include a ‘reserve power’ that would, if necessary, enable the government to set quantitative baseline targets for pension schemes to invest in a broader range of private assets, including the UK.
It said it did not anticipate exercising this power unless it considered that the industry has not delivered the change on its own, following the Mansion House commitments. It added that it would only intervene after making a “thorough assessment” of the potential impacts of any proposed quantitative targets on savers and economic growth.
“The threat of government telling trustees how they should invest is a step too far”
Laura Myers, partner and head of DC pensions at LCP
David Brooks, head of policy at Broadstone, said that setting out an explicit direction of travel towards mandating investment in UK assets and infrastructure wa a “risky move – not least because the Treasury itself has had to admit that any gains for savers are unclear and likely to be limited”.
“Savers will naturally be worried that their pension pots will not necessarily be invested with the best returns in mind but rather required to achieve specific allocations to Treasury-dictated geographies and sectors,” he added.
“The industry appears well-aligned with the government’s aims, provided the opportunities exist to invest. Mandating investment appears to provide a point of collision if the government believes the golden opportunities exist, but the industry disagrees.”
Laura Myers, partner and head of DC pensions at LCP said the threat of government telling trustees how they should invest “is a step too far”
Myers explained that trustees draw on professional expertise to draw up an investment strategy which will best meet the needs of members, and this should never be over-ridden by the political priorities of the government of the day.
She continued: “The industry has already voluntarily entered into various agreements to ensure that proper focus is given to investing in the UK economy and in long-term productive assets, but anything more than this risks losing sight of the primacy of member interests”.
Megafunds
The government today also confirmed that it is progressing with pension pot consolidation and a £25bn assets under management (AUM) requirement for DC pension funds by 2030. According to the government, this is the optimal size for the benefits of scale to be realised. The Society of Pension Professionals said it welcomed the government landed at £25bn as the minimum level given proposals for this to be £50bn in AUM.
According to today’s update from the government, the upcoming Pension Schemes Bill is also due to include a glide path for those schemes that are not yet at the required threshold. The government said that in circumstances in which a provider or master trust can demonstrate they will have at least £10bn in AUM in an arrangement by 2030, it will be able to apply to be on the transition pathway and must provide the regulator with a credible plan to have £25bn in AUM by 2035.
In its response to its consultation on ‘Unlocking the UK pensions market for growth’, the government projected 10-15 DC megafunds by 2030, and an improvement in member outcomes in the region of 3%.
The government said it was also committed to addressing fragmentation within DC workplace market and would therefore legislate to prevent new default arrangements from being created and operated, except in certain circumstances with regulatory approval. However, it has not set a maximum number of default arrangements or funds for any given DC scheme.
The bill is also due to introduce a contractual override regime, which will allow schemes to consolidate underperforming and legacy arrangements.
New rules on how ‘value for money’ is to be measured in different types of pension schemes are also expected to be legislated for in the upcoming Pension Schemes Bill. The government said that the framework will provide a consistent disclosure regime and make publicly available a range of data and metrics of scheme quality, including investment performance, showing the consistency of returns over time.
The Pensions Investment Review also confirms the March 2026 deadline for LGPS asset pooling, which will see £392bn held by 86 administering authorities consolidate into six pools, compared with the eight currently in existence.
The government said the pensions bill will include powers to protect the interests of LGPS members and local taxpayers where necessary by directing an administering authority to participate in a specific investment pool.
The government noted that local investment targets will be agreed with LGPS authorities, “securing £27.5bn for local priorities”.
Commenting on today’s flurry of pension announcements from the government, Janet Brown, partners at law firm Sackers, said: “Sometimes waiting for pensions developments can feel like waiting for public transport, and today three Government buses (with Torsten Bell MP very definitely ringing the bus stop bell to get the consultations out before the summer) have certainly arrived at once.”
“With the Pension Schemes Bill likely to follow hot on their heels in the next few weeks, today just marks the beginning of a very hectic pensions summer season.”
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