Pensions belong to savers, not the state
No government should have the power to direct where pension savings are invested, says Helen Whately
Alongside the Starmer-Mandelson debacle, the everyday work of government is stumbling on.
The Pension Schemes Bill, for instance, should by now be approaching the end of its legislative journey. Instead, it has run into sustained resistance in the House of Lords, where peers have handed the government a series of defeats.
For a beleaguered Prime Minister, the prospect of prorogation cannot come soon enough. But the Pensions Bill still needs work before it’s ready for the statute book.
There have been several sticking points, but the thorniest remains the power the government is taking over default auto-enrolled pension schemes.
In the Bill’s original draft, these so-called “mandation” powers amounted to a sweeping ability to direct how pension funds invest. Ministers have since rowed back. The latest version limits that power – allowing the government to require up to 10 per cent of assets to be invested in private markets, with up to five per cent allocated to the UK. These concessions make the Bill less objectionable, but that is not the same as making it good.
Increasing investment in the UK by pension funds and tilting funds towards assets which would generate higher returns for savers are understandable aims. Conservatives agree with both. The UK would benefit from increased investment. We want higher returns for savers, and in time, higher incomes for people when they retire.
The problem – and the objection from Parliament – is not the aim but the means.
No government should have the power to direct where people’s pension savings are invested.
Mandation undermines fiduciary duty
Pensions belong to savers, not the state. Pension fund trustees are not there to fulfil manifesto commitments or chase political pet projects. They are the custodians of people’s life savings.
Mandation undermines that fiduciary duty, forcing trustees to make investment decisions irrespective of the interests of pension fund members. In fact, potentially to their detriment.
And while the Mansion House Agreement contains commitments from government to increase the pipeline of investable opportunities, the Pension Schemes Bill includes no such promise for the implementation of the mandation power.
The pensions minister has tried several arguments to justify mandation.
He says it’s no different from the voluntary Mansion House Agreement. But it clearly is. A voluntary agreement between industry players is one thing; a legal requirement imposed across the entire sector is quite another.
He says it’s only a “reserve power” that the government has no intention of using. But if that’s the case, why legislate for it at all? The answer is simple: because even a reserve power changes behaviour. A voluntary agreement backed by a legal threat is no longer truly voluntary.
He argues it solves a collective action problem. The industry broadly accepts the need to move away from low-cost, low-return investments towards higher-return options. But firms are wary of being first movers. That is a real issue, but mandation is not the right fix.
So, what are the right fixes? Some of the answers are already in this Bill. The pensions dashboard will give people more visibility over savings. The Value for Money framework will help employers choose better-performing schemes and justify those choices to their staff.
This should be about informed choice, healthy competition and about making the market work better.
No surprise, this government thinks the answer is for the state to seize more power
In a last-ditch attempt to justify mandation, we now hear the minister claim that mandation was in the Labour Party manifesto.
It was not.
Their manifesto promised to boost investment from pension funds into UK markets and to improve returns for savers. It did not propose giving the government powers to direct how those funds invest, as set out in the Pension Schemes Bill.
Those are very different things – and there are better, less heavy-handed ways to achieve the same goals.
Government could, for instance, make the UK more attractive for pension funds to invest in. It could – indeed the Bill in part does this – tilt assessment of pension fund performance towards returns rather than the current focus on low cost.
No surprise, this government thinks the answer is for the state to seize more power. But that instinct is wrong. Even at this late stage, there is still time for them to get this right.
Helen Whately is shadow work and pensions secretary