Contribution
I want to make three points. First, we recognise that defined-contribution pension schemes have around £500 billion in assets under management. Around 20% of these assets are invested in the UK. That is down from 50% some 10 years ago. It is very welcome that the Government are focusing on this, so that we can ensure that these assets contribute to our growth.
The Committee received evidence in May from the Finance Innovation Lab, which told us that the UK has had the lowest level of business investment in the G7 for 24 of the last 30 years. The fundamental driver behind that is the fact that the financial system, including pension funds, does not support business investment as much as it should. That again emphasises the point that the Bill is very welcome. It should help us deal with that, particularly as it requires multi-employer DC schemes to have £25 billion in assets under management by 2030. That will give more schemes the advantage of economies of scale.
In a very welcome step, in the May 2025 Mansion House accord—I pay tribute to the Chancellor and her team for achieving this—there was a pledge from the 17 schemes that were part of that accord to invest 10% of their portfolios in assets that will boost the economy by 2030, with at least 5% of these portfolios being ring-fenced for the UK. This is expected to release £25 billion to the UK economy by 2030. None the less, the Bill includes a reserve power that the Government could use to mandate DC schemes to invest more in the UK economy. In evidence on 14 July, the Committee heard concerns that that would interfere with the fiduciary duty of trustees to prioritise investments that they judge will bring the best returns for scheme members.
In May, Yvonne Braun of the ABI told the Committee that it does not think the mandation is “desirable”. Instead, she said that the aim should be for it to be
“a rational choice—that the UK is an attractive environment for investing”.
The pensions industry wants the Government to concentrate on enabling the development of suitable assets for schemes to invest in, for example by improving the planning process and making the regulatory environment more predictable.
Rachel Croft, of the Association of Professional Pension Trustees, said:
“Forcing us to invest solely in the UK may run counter to that primary duty and focus, unless there is a pipeline of suitable investments in a format suitable for pension schemes to invest in. If that is the case, we will invest in them; if not, our primary duty will make us look elsewhere.”
Chris Curry, of the Pensions Policy Institute, thought that it was possible to create more UK investment opportunities and benefit members. He said:
“It still has to work in the interest of members—that is important—but if we are removing the barriers and making it easier to invest, and at the same time, providing more of a pipeline for investment and trying to package it so that it works well with how the pension system can operate, you are creating opportunity.”
He described mandation as “blunt” and “inflexible”, and said that it would be difficult to design a scheme that worked effectively in practice and did not give rise to unintended consequences. For example, he said that there would be a challenge in defining what counts as a UK investment. If the Government decided to mandate that schemes invested a particular percentage in the UK, how would the system respond to market movements that might temporarily reduce the percentage below that level? He wanted the Government to consider the unintended consequences of that. The liability-driven episode in September 2022 showed the potential risk of a lot of pension schemes effectively being asked to do the same thing at the same time.
The Bill includes a sunset clause preventing the use of the mandation power beyond 2035. Pensions UK wants to see that timeframe reduce, saying it should be just for the lifetime of the Parliament. It also wants to see the scope limited, so the investment mandation cannot be prescribed beyond the allocations voluntarily committed to in the Mansion House accord, in other words the 10% of default funds into private markets, of which 5% are in UK-based assets.
On fiduciary duties, Jesse Griffiths of the Finance Innovation Lab said that
“while the fiduciary duty should be paramount for the schemes, the Government has a different and broader mandate, and it needs to look at the collective interests of all pension savers as a whole…In particular, when you think about the deep inequality that is embedded in the system, the ONS estimates that the bottom half of the population holds just 1% of all pension assets and the top 10% holds almost two thirds. If you just focus on growing the financial returns, most people will not benefit from that. I would argue that a system that also supports a stronger economy and the green transition would benefit most people more than a system that is focused on higher returns.”
Will the Minister help us to understand the context for the criteria in which mandation powers might be used? What will be the success criteria, other than the 5% investment from this approach? Should the sunset clause, to prevent the use of this mandation power beyond 2035, be brought forward to the end of this Parliament, as I mentioned? Do the Government guarantee that mandations should go no further than the aims of the Mansion House accord?