Michael Jones: This is at odds with the final report of the Pensions Investment Review and would shift the voluntary commitments of the Mansion House Accord to a regulator-led condition for approval
The government has been urged to provide urgent clarification over fears that a Pension Schemes Bill clause on asset allocation tests could introduce “mandation by the back door”.
The Pension Schemes Bill – laid in parliament yesterday – will require commercial defined contribution (DC) master trusts and providers to have at least one main scale default arrangement (MSDA) of at least £25bn by 2030, or by 2035 if they can show credible progress towards this target by 2030.
This comes after the publication of the final report of the Pensions Investment Review last week, where the government indicated it would include a reserve power in the Pension Schemes Bill to set mandatory asset allocation targets which it would only exercise should the industry does not deliver changes on its own, following the Mansion House Accord.
But, in a surprise move, the bill will also require all MSDAs to be approved by the relevant regulator, either the Financial Conduct Authority or The Pensions Regulator.
Eversheds Sutherland partner and head of DC Michael Jones said: "Critically – as part of this approval process – the relevant regulator may approve a relevant master trust or group personal pension plan only if it determines that the scheme holds at least the prescribed percentage of qualifying assets in in its funds."
In the bill, qualifying assets are defined as productive finance assets such as private equity, private debt, venture capital, property, which may include assets located in the UK.
Jones said that through these measures, it appears the regulators will have power to apply an "asset allocation test" in deciding whether to approve a MSDA.
He said: "This is at odds with the final report of the Pensions Investment Review and would be a major step for the government to take, introducing mandation by the back door for commercial DC providers and schemes and shifting the voluntary commitments of the Mansion House Accord to a regulator-led condition for approval."
Jones added: "Therefore, it is essential the government clarifies how it sees this new requirement operating and how this measure squares with the final report of the Pensions Investment Review published last week and its statement that it does not anticipate setting minimum asset allocation thresholds for the time being."
Regulation key
Sackers said it was important to note that mandation would not become law immediately when the Pension Schemes Bill becomes an Act - noting that separate regulations would be needed first in order to bring it into force and set out much of the detail of exactly what is mandatory.
In a blog, Sackers partners Andy Lewis and Jacqui Reid said both the types of private market assets that could be mandated - the so called "qualifying assets" - as well as the exact percentage target would be largely left to regulations.
They said this could, in theory, allow a government to use regulations to set targets which look very different from those voluntarily agreed by the parties to the Mansion House Compact and Mansion House Accord. But they added there was a limited sunset on this - with the bill saying, in effect, that the government cannot increase the percentage after 31 December 2035.
Lewis and Reid added that, as well as overriding investment duties under the common law, the bill expressly says that mandation overrides any conflicting provisions in scheme rules - something they said would "not be a surprise" for lawyers.
They said industry regulators would have a role in "approving" schemes' compliance with mandation - adding that it appeared that a failure to obtain approval would affect the scheme's eligibility to be a qualifying scheme for automatic enrolment purposes.
