The government risks a clash with the pensions industry after Rachel Reeves refused to rule out forcing workplace retirement schemes to boost their investments in the UK.
The tensions came just hours after 17 of Britain’s biggest workplace pensions providers made a pledge to the government to lift their investments in riskier but potentially higher returning private markets by as much as £50 billion by 2030, with half of this — an estimated £25 billion — to be directed into UK assets.
While this industry commitment is voluntary, it followed months of wrangling with the Treasury, which is under pressure to bolster economic growth.
The chancellor is also leaving the door open to forcing, or mandating, retirement schemes to invest in certain assets if the Treasury is unhappy with the progress that funds make on this week’s commitment, which has been dubbed the Mansion House accord.
It is understood that a government review into pension investments, which is due within weeks, will recommend that the government is granted the power to mandate binding asset allocation targets on schemes.
While the Treasury believes it ultimately will not need to use this power, which is likely to be time-limited, it is nevertheless a contentious proposal for the industry because it risks clashing with pension trustees’ fiduciary duty to secure good outcomes for their members.
Asked on Tuesday in a Bloomberg Television interview about the possibility of mandating funds to invest in the UK, Reeves did not rule it out, saying: “I’m never going to say never but I don’t think it’s necessary.”
A number of pension providers that have signed up to the Mansion House accord immediately pushed back on the idea. A spokesman for Phoenix Group, the FTSE 100 retirement and insurance company, said: “We believe the most sustainable solution lies in creating the right incentives, not mandates.”
Phil Parkinson, who runs the retirement and investments business at Mercer UK, said: “We don’t think mandation is the right step but equally we don’t think it’s necessary.”
Jamie Jenkins, the director of policy at Royal London, another signatory of this week’s agreement, said: “It has been clear for a while that the government would reserve the power to mandate investment.” But he warned: “There could be a strong, negative reaction from people if they feel the government is telling them how to invest their retirement savings.”
Jo Sharples, a senior executive at Aon, said that mandation “would represent a shift in responsibility” that could “run the risk of less effective decisions being made”. She added: “This could lead to schemes picking up sub-optimal assets or overpaying for assets, neither of which will be in members’ best interest.”
• We can’t afford to allow our pension funds to shun UK assets any longer
Reeves argued that the voluntary nature of this week’s accord “shows that you don’t need to use mandation”. Even so, the agreement was heavily caveated by the pensions industry. While retirement scheme providers committed themselves to allocating at least 10 per cent of their defined contribution default funds to private markets, with half of this, or 5 per cent, going into the UK, the industry said this was subject to fiduciary duty and was dependent on the government and regulators implementing “critical enablers”.
Scottish Widows, the pensions company owned by Lloyds Banking Group, was notably not among the 17 providers that signed the accord.
