Government cuts last-minute deal to cross landmark pension legislation with controversial new funding powers curbed

The Pensions Schemes Bill has passed into law after last-minute concessions limiting new government powers to force investment decisions on pension schemes.

The broad aim of the new law is to boost individual people’s pensions and economic growth at the same time.

But a row revolved around a so-called ‘backstop’ to make sure big pension firms deliver on a voluntary pledge to invest 10 per cent of funds into private assets and infrastructure projects – and 5 per cent of this in the UK – by 2030.

Pension firms and other financial experts protested that retirement fund providers are meant to act purely in savers’ best interests.

Campaigners like former Pensions Minister Ros Altmann, who now sits in the House of Lords, voiced fears the law would allow the Government to over-ride this principle and issue ‘diktats’ to invest in its preferred projects and assets.

So how was the stand-off resolved and what else do savers need to know about how the new law might boost their retirement pots in future.

How did the Government reach a compromise?

Concessions were made to weaken government powers to ‘mandate’ pension fund investments in private assets and infrastructure if they don’t do it off their own bat.

The promise pension firms made in the Mansion House Accord to pile money into these assets only applies to ‘default’ funds.

These are where staff’s retirement savings are placed automatically unless they choose other funds within a workplace scheme.

However, the overwhelming majority of workers stick with the default fund rather than make active investment decisions.

After weeks of ‘ping pong’ between the House of Commons and the House of Lords, they agreed the Government would retain some ‘mandation’ powers but in a more limited form than first proposed.

– Investment is capped in line with what was pledged in the Mansion House Accord, and does not apply to whatever asset class in whatever quantity the Government decides.

– The power has a ‘sunset clause’ meaning it will expire in 2032.

– Pension firms can fulfil their promise by putting money in investment trusts with suitable holdings.

– An assessment must be carried out before the mandation power is deployed.

What else does the new law include?

The measures include a clampdown on defined contribution pension schemes offering poor value for money to savers, forcing them to merge if they are falling short and creating ‘mega’ funds which can make better investment returns.

The law will also make pension schemes offer people reaching retirement age clear ‘default’ options to turn their fund into an income to live on in old age.

Local Government Pension Scheme assets will be merged into pools that will support long-term investment in local infrastructure, housing and clean energy.

Final salary, also known as defined benefit, pension schemes will be allowed to release surplus funds, unlocking around £160billion.

Pensions Minister Torsten Bell says the passing of the new law is a landmark moment for 22 million workers building up a pension pot.

‘For too long, our pensions system has been fragmented and rarely ensures that people’s savings are working hard enough to support them in retirement.

‘The Pensions Schemes Act will change that by creating schemes that drive down costs, deliver higher returns, and give savers the security they deserve.’

Concessions include important guardrails

‘The passing of the Pension Schemes Bill signals the biggest changes to pensions since automatic enrolment was introduced over a decade ago,’ says Jamie Jenkins, director of policy at Royal London.

‘While the Government has had to compromise in a few areas, the substance of the Bill remains largely unchanged since it was introduced almost a year ago.

‘The UK pensions system will therefore transition to one with fewer, larger pension providers with much greater focus on scale for investment, and value for savers.’

Lisa Picardo, chief business officer at PensionBee, says: ‘After months of parliamentary deadlock, the government’s late concession is a welcome watering down of the controversial mandation clause.

‘The compromise offers some important guardrails and restrictions that have been agreed since the original clause appeared – caps aligned with the voluntary Mansion House Accord, limiting it to auto-enrolment defaults as opposed to entire schemes, a single-use restriction, an earlier 2032 sunset and a full repeal in 2035.

‘Ultimately, the trustees and providers bear the responsibility for serving their members, and ensuring that they put their best interests above any others – this should continue to take precedence over any political persuasion.’

Sceptics can move savings out of ‘default’ pension funds

Jason Hollands, managing director at Bestinvest, says of the new legislation: ‘This might seem like an abstract and far-off issue to most workplace pension savers, but we would advise that they take good note of the implications.

‘Its passage has been overshadowed by contentious Government proposals to retain reserve powers to mandate investment allocations. 

‘After rounds of parliamentary ‘ping pong’ between the Commons and the Lords, the final Bill includes watered-down powers with statutory guardrails.

‘Even so, many industry observers remain uncomfortable in principle with the idea of Government being able to direct pension schemes’ asset allocation decisions.’

Hollands says some pension savers will be relaxed about their pension fund investing in private assets, but sceptics can take action by moving savings from the default fund to others within their scheme.

‘One size does not fit all and therefore most workplace pensions offer a choice of funds, so savers who want a different approach from the default fund have the option of reviewing the alternative options available within their scheme.

‘And don’t forget legacy pensions. As people change jobs, they typically build up a variety of pension pots along the way that can sometimes be forgotten about. It is worth checking where these are invested.’