6 hours ago
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A simple principle lies at the heart of pension investment: the pension manager must invest in the best interest of the client. UK ministers have often wished UK funds would show more home bias by channelling more pensioners’ cash towards domestic assets in the interests of economic growth, but the fundamental rule of the game has always been understood. You don’t mess with the fiduciary duty.
Thus, when Rachel Reeves a year ago unveiled her Mansion House accord – a pledge by 17 of the biggest providers to earmark a slice of workplace pensions for UK private assets – it was made clear the arrangement was voluntary. What’s more, as the signatories emphasised, the commitment was “subject to fiduciary duty and the consumer duty” and “dependent on implementation by the government and regulators of critical enablers”.
Those essential qualifications, one could say, weakened the force of the accord, but what else could the chancellor do? On the plus side, she had secured a flag-waving announcement that demonstrated willingness on the part of the funds to try to meet the specific goal of allocating 10% of assets to private markets (think infrastructure, property, venture capital), of which half would be in the UK. All the big names – Aviva, Legal & General, M&G, Mercer, NatWest and more – were on board. Their progress towards the target could be measured.
Life became messy, however, when Reeves raised the prospect of having powers to mandate the funds to follow through on their commitments. One can understand her motivation, of course. If you think more UK investment by UK funds means faster UK growth, you want to be confident the cash will flow. Yet “backstop” powers always failed a test of logic: how can a pledge be both voluntary and enforceable?
Most of the same big names spoke up against “mandation”. Scary visions were raised of the government, or a future one, forcing pension savings to be thrown into money-pits such as the HS2 railway. It didn’t matter how many times the pensions minister, Torsten Bell, said there was no intention to use the powers, the providers were adamant: their fiduciary duties came first. Quite right, too.
At that point, the government should have recognised it was in danger of burning goodwill, and given up on mandation. Instead, it ploughed on, introducing a clause into the pension schemes bill. The result was a round of ping pong with an admirably awkward House of Lords, a couple of concessions, and then bigger concessions this week to get the bill over the line.
In short, a back-stop power will still exist – but only in heavily diluted form. The powers can’t be used before 2028. They will disappear if not used by 2032, and by 2035 if they are. Critically, a “saver’s interest test” means the government would have to ask the financial regulator to assess any ministerial direction to mandate. Nor can ministers force money towards specific projects, meaning the HS2 nightmare is off the table.
Reeves and Bell can console themselves that something that vaguely resembles the original mandation idea is on the statute book. And, maybe, as a result of the months of kerfuffle, a little more money will flow to UK assets than would otherwise have been the case.
In reality, the retreats and compromises have, thankfully, robbed mandation of its bite. After this bruising battle, it would be brave for a chancellor to go to the Financial Conduct Authority for an independent assessment of use of the powers. Such a move would invite quarrels over two of the providers’ underlying concerns – whether there are enough attractive investable projects and whether government encouragement towards one asset class inflates prices against the interest of savers.
The pity is that the core of the pensions bill is excellent, including measures to force consolidation and efficiencies in the pension fund world – changes that have been talked about for 20 years. But to be seen to try to trample on fiduciary duty was a clear mistake. A big climbdown looked inevitable, and has now happened.
“I think if the government were to come along in a couple of years’ time with a Mansion House accord 2.0, we would be sceptical,” says one industry figure. The scepticism is understandable – and could have been avoided.
