The government's proposed power to influence investment decisions within defined contribution (DC) pension schemes, outlined in the Pension Schemes Bill, has faced renewed scrutiny after Bank of England governor, Andrew Bailey, cautioned that such an intervention would not be "appropriate” and require “a lot of heavy lifting".

According to the Press Association, Bailey said today (9 July) that he supports structural changes in the pensions industry but rejected the idea of mandating where schemes should allocate capital, stating: “I do not support mandating. I don’t think that’s appropriate”.

“We’ve had a low level of pension fund investment in the economy, and I think structural changes to the pension industry are helpful in this effect. However, I do not support mandating, I don’t think that’s appropriate,” Bailey said.

“I think reforming the pensions industry does require a lot of heavy lifting, but it needs to be done,” he added, stressing that he hopes changes will be ‘natural’.

The bill, which was debated in the House of Commons for the first time on 7 July, includes a clause that would allow the government to tell DC pension schemes how to invest. 

LCP explained that the aim of the clause in the bill, which the government has said is a backstop power which it hopes not to use, would be to “force” schemes to invest a minimum proportion in assets such as UK infrastructure and UK private markets.

So far, progress on driving forward investment in these areas has been through voluntary agreements such as the Mansion House Accord commitment by 17 schemes and providers to invest 10 per cent in private assets, of which 5 per cent would be in the UK. 

However, LCP said that the government controversially decided to give itself the power to force schemes to invest in a particular way, partly to put pressure on providers to meet these voluntary commitments.

Commenting on Bailey’s remarks, LCP partner, Steve Webb, said: “The governor will not have chosen lightly to be so critical of government policy, and his ‘nuclear’ intervention will be very unwelcome at the Department for Work and Pensions.”

However, Webb said the governor speaks for many in thinking that the government is “crossing a line” if it presses ahead with plans to tell pension schemes how to invest. 

“Whilst pension assets can certainly be used more productively, it is ultimately for the trustees of pension schemes to decide how to invest in the best interests of their members, and not for ministers to tell them how to invest,” he said.

“This challenge raises serious questions about whether this policy will survive scrutiny in the House of Commons and House of Lords over the coming months.”

There has been wide industry debate around this backstop power, including at the recent second reading of the bill and when the bill was introduced.

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