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Experts have noted that a controversial change in UK pension legislation will lead more defined contribution workplace schemes to enhance their investments in British private markets.
The Pensions Schemes Bill, released on Thursday, establishes rules that allow regulators to mandate default funds in workplace DC schemes to invest in particular assets, such as private equity, private debt, venture capital, or real estate.
This authority, to be implemented by the Financial Conduct Authority and the Pensions Regulator, is accompanied by a new stipulation requiring multi-employer DC schemes to have assets totaling at least £25 billion by 2030, or by 2035 if they can show they are progressing towards that goal.
Michael Jones, a partner at Eversheds Sutherland, remarked, “Linking asset allocation to size requirements is a clever strategy. It gives regulators the authority to approve or disapprove smaller providers based on their investment practices aligned with government expectations.”
According to Gareth Henty, head of UK pensions at PwC, the potential for mandates will prompt large multi-employer schemes to start investing more in private markets to avoid future constraints, indicating that “opportunities may not be as appealing later on.”
This bill provision follows a commitment from 17 major DC workplace pension providers, who agreed to invest at least 5% of their assets in UK private markets by 2030 under last month’s Mansion House Accord.
The government is optimistic that this voluntary agreement, along with the establishment of DC “megafunds” at £25 billion, can direct £50 billion towards UK scale-up companies, infrastructure, and real estate.
Chancellor Rachel Reeves confirmed last week that she would establish a “backstop” power to compel large pension funds to support British investments, despite some resistance from figures in the City.
The proposed authority for regulators to determine asset allocation will affect only the default funds of large multi-employer DC schemes.
“There was a real concern that it could apply universally, impacting defined benefit and non-commercial schemes,” said Jones.
This investment direction power also comes with a sunset provision that will kick in after December 2035, meaning it will lapse if not utilized by then.
“Implementing a power allowing the government to guide how defined contribution schemes invest will need careful examination,” stated the Pensions and Lifetime Savings Association.
The trade group expressed particular worry that the sunset provision extends beyond the current parliamentary session and grants broad authorities to the secretary of state for directing investments or setting targets.
Sir Steve Webb, a former pensions minister and now a partner at LCP consultancy, stated, “[Ministers] have incorporated a power into the law that could be used by others . . . nobody should possess this power . . . it generates instability and unpredictability for pension schemes.”
