The House of Lords has voted to remove the government's power to mandate the asset allocation of pension schemes from the Pension Schemes Bill.
Under the government proposals, ministers could require DC schemes to invest their default funds in specific asset classes, seeking in particular to increase investment in “productive finance” such as infrastructure, startups, and private markets.
The government said the decision would boost economic growth and improve pension outcomes simultaneously. Policymakers argue that UK pension funds are overly invested in low-risk assets and underinvest in domestic opportunities. By redirecting capital, the government hopes to channel billions into UK businesses while potentially achieving higher long-term returns for savers.
However, critics argue mandation risks undermining fiduciary duty, as trustees are legally required to act in members’ best interests, not government policy goals.
There are also concerns about politicisation of investment decisions and the danger of forcing funds into unsuitable or underperforming assets.
Recent research from the ABI revealed widespread uncertainty over the proposals, with an overwhelming 72% of UK adults having little or no confidence in the government to make the right decisions about how their pension is invested. Only 1% have a lot of confidence.
46% of adults aged over 45 think requiring pension funds to invest in certain assets would negatively impact the amount of money they’ll have in their retirement, with just 5% believe the requirements would have a positive impact.
The Bill will soon return to the Commons for MPs to reconsider the wide-reaching nature of these powers.
Zoe Alexander, executive director of policy and advocacy at Pensions UK, said: “The Lords’ amendment to remove the power in the Pension Schemes Bill for government to direct how retirement savings are invested is a win for savers. Having the power on the statute book would expose millions of workers’ retirement savings to political cycles and undermine the duty of pension trustees to act at all times in the interests of savers.
“Pensions UK’s preferred method to drive investment in UK markets is a voluntary approach supported by improvements to the investment environment.
“The Mansion House Accord, a commitment by 17 of the largest UK pension providers to back unlisted UK and global investment opportunities where they are in the best interests of savers, shows there is already strong support.”
Nigel Green, CEO and founder of deVere Group, commented: “The House of Lords has made the right call. Pension funds are not tools of government policy. They exist to deliver the strongest possible outcomes for savers, and that requires independence in how capital is allocated.
“Giving ministers the power to influence where defined contribution schemes invest risks crossing a line that should not be blurred. Investment decisions must be driven by returns, risk management and diversification, not political priorities.
“There’s a better way to attract investment into UK markets. Improve the environment, strengthen opportunities, and capital will follow. Coercion achieves the opposite.
“Confidence in long-term saving depends on clarity and trust. Savers need to know their pensions are managed with discipline and independence. This decision protects that principle.”
Jonathan Parker, managing director and head of DC at Gallagher, added: "Trustees will breathe a sigh of relief at the House of Lords’ vote to remove the reserve power from the Pension Schemes Bill. Its reach went far beyond the original intent of supporting voluntary commitments and would have had serious consequences for members as even as a backstop, it represented a significant risk.
“Since the government tabled the amendment, there were widespread calls for the proposal to be dropped entirely, highlighting understandable concerns among trustees about how such a broad power could be justified.
“As the amendment now returns to the House of Commons, trustees will need to remain vigilant amid a rapidly evolving regulatory landscape. This is a hugely reassuring development, though, and rightly places member outcomes front and centre, easing fears that savers’ hard-earned money could be exposed to short-term political whims.”
