Pension Schemes Bill – the “backstop” power

Many column inches have been generated since the publishing of the draft Pension Schemes Bill on 5 June 2025, and a significant proportion of those relate to what the Government calls its “backstop” power to require DC schemes to invest their default funds in specific asset classes. In a Bill that makes fundamental changes across the pensions landscape, it's telling that so much of the discussion in the past few weeks has focused on this particular measure. 

With criticisms of the power being levied from both sides of the aisle in last week’s second reading of the Bill in the Commons and comments from the Governor of the Bank of England that he does not support the mandation of pension scheme investments, it's fair to say opposition to the power is gathering quite a head of steam. In this article, we take a closer look at what the power in the Bill actually is, what safeguards there are and consider potential improvements.

Context

There’s no doubt the Government’s growth agenda is driving pensions policy.  Among a host of growth-focused pension reforms, a key aim is to increase the proportion of “productive” assets in which UK pension funds invest - not a term you’ll find defined anywhere in the Bill but broadly understood to mean investments in private markets and infrastructure. The current push to increase productive asset allocation by DC schemes builds on work begun under the previous Government and its 2023 Mansion House Compact.

In May, seventeen of the UK’s largest pension providers signed the Mansion House Accord – signalling a voluntary expression of their intent “to achieve a minimum 10% allocation to private markets across all main default funds in their DC schemes by 2030, with at least 5% of the total going to UK private markets”.  You can read more in our May article.

As we highlighted at the time, the rumour mill was already in full swing with whispers that, notwithstanding the Accord, the Government was still considering giving itself some kind of mandation power. And so it has come to pass – the draft Bill includes a power for the government to specify minimum levels of investment in particular asset classes for DC schemes’ default funds.

What does the Bill actually say?

The form of the power is interesting – at first glance it’s not straightforward to find in the Bill.

There is a mechanism in the Bill for specified asset allocations in the scheme’s default fund to become a condition for a master trust to be authorised as an auto-enrolment scheme (see condition 2 in proposed new s20(1A) of the Pensions Act 2008 (PA08)).   An equivalent mechanism is included to allow for a minimum level of investment in “qualifying assets” to be a requirement for GPPs used for auto-enrolment.

So the power only applies to master trusts and GPPs used for auto-enrolment and only to their default arrangements (NB this is not the same as the main scale default arrangement under the scale requirements).

The details of the new asset allocation requirement will be found in a new s28C to be inserted in the PA08.  There is no substantive asset allocation prescribed – rather, there is a permissive power to make regulations to do so under a new section 28C(2), which says they may provide that a master trust or GPP cannot be approved by the Pensions Regulator / FCA (as applicable) unless “at least the prescribed percentage (by value) of the totality of assets of a particular description held in funds of the scheme are qualifying assets”. Section 28C(1) gives TPR / FCA the responsibility for determining whether the scheme meets the requirement.

There are some indications in the sub-sections that follow as to what an asset allocation requirement can prescribe: s28C(5) sets out examples of “qualifying assets” that may be prescribed and include: 

1. private equity, 
2. private debt
3. venture capital, or 
4. interests in land.

Some listed assets are specifically excluded but growth markets such as AIM are included. 

As set out in the Bill’s accompanying explanatory notes, “Subsection 28C(6) provides that assets may be defined as qualifying assets on the basis of their presence in the UK or other factors linking the asset to economic activity within the UK.”

The Bill includes a power to exempt certain schemes from the asset allocation requirements through regulations (see clause 38(4) inserting proposed new section 20(1B)), and it also makes clear that any provision under the new section 28C will override conflicting provisions in an individual scheme’s trust deed and rules.

What safeguards are included?

Even before the Bill was published it was clear any form of mandation power was going to be controversial with both legal (how can mandation be squared with trustee fiduciary duties?) and practical (how do we secure sufficient quality investment opportunities to meet the requirement?) concerns raised as to the impact of such a power.

This is recognised to some extent in the Bill, which includes a number of protections:

1. The power is time-limited – there is a “sunset” provision in clause 38(16) of the Bill which provides that if the power under section 28C(1) Pensions Act 2008 (approvals in respect of asset allocations) has not been exercised before end of 2035 the whole of that section 28C expires.  We note Pensions UK are lobbying to reduce this so the duration of the power is tied to the term of the Parliament.
2. There is a mechanism to make regulations allowing a master trust or GPP to apply to TPR / the FCA for an exemption from any asset allocation requirement that is specified under section 28C. This is found in proposed new section 28F PA08, subsection (2) of which prescribes that such regulations:
   1. Must provide that the relevant Authority can only grant the exemption if it is of the view that “meeting the asset allocation requirement would cause material financial detriment to the scheme or members of the scheme”; and
   2. May make provision about the process for making a determination, including details such as time limits and procedures.
3. Before making the first set of regulations made under section 28C, proposed new section 28C(11) requires the Secretary of State to prepare and publish a report regarding:
   1. how the financial interests of members are or would be affected by the proposed regulations; 
   2. what effect the proposed measures could be expected to have on economic growth in the UK; and 
   3. any other matters the Secretary of State considers appropriate.

In addition, any regulations made under section 28C will have to be reviewed before the end of the 5 year period beginning when they come into force (proposed new section 30A PA08).  The review must be published and laid before Parliament and must consider the impact on members’ financial interests and the effect on UK economic growth.

4.  Before making any regulations under the new section 28C Pensions Act 2008, the Secretary of State is required to consult the Treasury (subsection (12).

What does the Government say?

Government rhetoric has been very clear this is intended to be a “backstop power” to be used as a measure of last resort only if the voluntary commitments given in the Mansion House Accord fail to deliver the shift in investments the Government is seeking.  See for example, the following extract from the Pensions Investment review final report:

“….the Pension Schemes Bill will include a reserve power which would, if necessary, enable the government to set quantitative baseline targets for pension schemes to invest in a broader range of private assets, including in the UK, for the benefit of savers and for the economy. 

The government does not anticipate exercising the power unless it considers that the industry has not delivered the change on its own, following the Mansion House commitments.  Moreover, it would only intervene in this way having made a thorough assessment of the potential impacts of any proposed quantitative targets on savers and economic growth.” 

In the second reading of the Bill in the House of Commons on 7 July, concerns were raised about the backstop power by a number of MPs, including Dame Meg Hillier (Labour MP and trustee of the Parliamentary Contributory Pension Fund).  In response, Pensions Minister Torsten Bell said the Bill “includes clear safeguards to prioritise savers’ interests and is entirely consistent with the core principle of trustees’ fiduciary duties. Clause 38 includes an explicit mechanism, which I have discussed with Members from the main three parties in this House, to allow providers to opt out if complying risks material detriment to savers”.  However, as we’ve set out above, opt out is only available with regulatory approval – trustees alone cannot decide not to apply the asset allocation requirement to their scheme’s default arrangement.

Why so much opposition?

Whatever the hoped for gains, the potential downsides of a mandation power are not difficult to foresee – forcing schemes to invest in a particular asset class risks driving up costs and driving down value as funds compete for a limited pool of suitable assets.  The Government will point to the safeguards in the Bill but is there more that can be done?

As we highlighted in our May article, the voluntary commitment in the Mansion House Accord to achieve the specified asset allocations were expressly made subject to fiduciary duties and the Consumer Duty and in reliance on Government support, including a number of “critical enablers”.  These include a pipeline of UK investment opportunities and a market-wide shift in focus from cost to value, supported by the new Value for Money framework. 

There are no such parameters in the Pension Schemes Bill’s backstop power – could the drafting be improved to include similar “critical enablers” and give schemes greater comfort the power won’t be used without the support the industry has made clear it needs?

And at a more fundamental level, critics see this as the thin end of the wedge in terms of mandating what schemes do with their members’ money – once Pandora’s box is opened there is no going back.  Concerns have been raised regarding the interaction with fiduciary duties of course, and as highlighted above, while helpful, the “material detriment to saver interest” exemption cannot be exercised by trustees alone – they have to apply to TPR to be granted an exemption for a specified period. And there are also concerns for trustees in relation to who might be held to account in the event a mandated investment does not perform – will the trustees be exposed, as result of the Government mandate, to criticism for investing otherwise than they might have done?

There is some comfort for trustees here under the existing law – investment decisions are notoriously difficult to successfully challenge in the courts, provided trustees comply with all the usual requirements under the Investment Regulations and consider appropriate advice from a properly appointed investment adviser (including interrogating and understanding such advice). A successful defence is all the more likely if the investment in question was compelled by a legal requirement.  Nevertheless, some kind of specific exemption for trustees investing in line with a Government mandate, or “safe harbour” per the US model, would no doubt be very welcome.

Focus on creating opportunities

With gathering opposition to the mandation power in the Bill, the Government’s focus on delivering a pipeline of well-packaged readily investible assets should be keener than ever.  If the Government can meet its ambitions for pension funds and productive finance through a voluntary shift, the controversial backstop power would be redundant in any case.

This responsibility is explicitly recognised in the Roadmap document which accompanied the Pension Schemes Bill: 

“The government also recognises its role to support this diversification of investment.  Through initiatives such as the British Growth Partnership, the establishment of the National Wealth Fund and continued support for Long Term Asset Funds (LTAFs), the government is creating opportunities for pension schemes to more easily invest in the UK’s biggest growth opportunities. Significant regulatory and planning reforms will also ensure a stronger pipeline of housing and infrastructure projects (including clean energy projects).”

And the investment industry too should be grasping the nettle, nay the opportunity(!?) by producing the right kind of well-packaged, well-signposted investment opportunities for pension schemes that have openly signalled they are ready and willing to invest productively in the UK if they are provided with the asset opportunities they need.   We have already seen pension funds from Canada, Australia and other jurisdictions, to which the Chancellor has looked for inspiration, acquire significant holdings in UK infrastructure so we know it can be done where the circumstances are right.  In her recent keynote speech to the Annual Conference of the Investment Association, TPR’s CEO Nausicaa Delfas threw down the gauntlet to investment managers, asking them to play their part at this time of “transformation for the pensions industry”. 

Comment

The future of the investment mandation “backstop” power in the Bill looks increasingly uncertain, with Bank of England Governor Andrew Bailey last week adding his voice to the growing number raising concerns. 

With that momentum growing, and the risk the power does not survive the Bill’s passage through Parliament, there is all the more reason for the Government to focus on supporting schemes to reach the Mansion House Accord targets voluntarily, by delivering attractive assets into which schemes are able to actively choose to invest in their members best interests.  We will continue to monitor developments in this area with interest over the coming months.