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A contentious change in UK legislation around pensions will push more defined contribution workplace schemes to boost investment in British private markets, pension experts have said.
The Pensions Schemes Bill, published on Thursday, sets a framework to allow regulators to force the default funds of workplace DC schemes to invest in specific assets including private equity, private debt, venture capital or property.
The power, which would be enforced by the Financial Conduct Authority and the Pensions Regulator, comes alongside a new requirement for multi-employer DC schemes to have assets of at least £25bn by 2030, or 2035 provided that they can demonstrate they are on track to hit the target by that point.
Michael Jones, partner at law firm Eversheds Sutherland, said: “Tying asset allocation to the scale requirements is a clever way of doing it . . . by giving the regulators the power to approve or not approve a sub-scale provider depending on if they are investing in the way the government wants.”
Gareth Henty, head of UK pensions at consultancy PwC, said the threat of mandation would “fire the starting gun” for large multi-employer schemes to invest more in private markets before they were forced to do so, at which might point “what’s left might not be as attractive as what’s sourced early”.
The provision in the bill comes after 17 of the UK’s largest DC workplace pension providers pledged to invest at least 5 per cent of their assets in UK private markets by 2030 under the Mansion House Accord signed last month.
The government hopes the voluntary commitment — alongside the creation of DC “megafunds” of £25bn — will push £50bn of investment into UK scale-up companies, infrastructure and property.
Chancellor Rachel Reeves last week confirmed she would create a “backstop” power to force large pension funds to back British assets, despite pushback from some City figures.
The proposed reserve power for regulators to set asset allocation requirements will apply only to the default funds of large multi-employer DC schemes.
“There was a genuine concern that it would apply across the book, including defined benefit and non-commercial schemes,” Jones said.
The power to direct investments also comes with a sunset clause of December 2035, after which it will expire if not used already.
“The introduction of a reserve power to allow government to direct how defined contribution schemes invest will require very close scrutiny,” said the Pensions and Lifetime Savings Association.
The trade group added that it was “particularly concerned that the sunset clause extends beyond the current parliament . . . and contains very broad discretions for the secretary of state to direct investments or set targets”.
Sir Steve Webb, a former pensions minister and now a partner at consultancy LCP, said: “[Ministers] have put in the statute book a power that someone else can pick up . . . nobody should have this power . . . it creates instability and uncertainty for pension schemes”.