Rachel Reeves’s plan to mandate how pension funds invest was always a mistake | Nils Pratley

The Guardian's Nils Pratley argues that Chancellor Rachel Reeves's plan to mandate how pension funds invest was a mistake from the outset, because it conflicts with the fiduciary duty pension managers owe their clients. A year ago Reeves unveiled the Mansion House accord, in which 17 of the largest workplace pension providers pledged to earmark a share of assets for UK private assets. The commitment was voluntary and explicitly subject to fiduciary duty, the consumer duty, and government and regulatory implementation of "critical enablers." The target was 10% of assets in private markets, including infrastructure, property and venture capital, with half of that allocation in the UK. Signatories included Aviva, Legal & General, M&G, Mercer and NatWest.

Reeves subsequently raised the prospect of statutory powers to compel funds to follow through. Pratley notes the logical tension in a pledge that is both voluntary and enforceable. Most of the signatories objected, warning of pressure to invest in projects such as the HS2 railway. Pensions minister Torsten Bell repeatedly said there was no intention to use the powers, but providers maintained that their fiduciary duties came first. Rather than abandon the idea, the government introduced a clause into the pension schemes bill, which went through a series of exchanges with the House of Lords and was ultimately amended through concessions this week to secure passage.

The enacted back-stop power is substantially weaker than the original proposal. Under the revised terms, the powers cannot be used before 2028, will lapse if unused by 2032, and will expire by 2035 if used. A saver's interest test would require the government to ask the Financial Conduct Authority to assess any ministerial direction to mandate, and ministers cannot steer funds toward specific projects. Pratley suggests the powers have been largely robbed of their bite, and that using them would invite disputes over whether sufficient attractive investable projects exist and whether favouring one asset class inflates prices to savers' detriment. Reeves and Bell may point to some additional flow of capital into UK assets, but the commentary concludes that the episode has damaged goodwill. Pratley argues the bill's core measures, including forced consolidation and efficiencies in the pension sector that have been discussed for two decades, are sound, and that the mandation dispute was an avoidable climbdown. One industry figure quoted in the piece says the sector would be sceptical of any future Mansion House accord 2.0.