Labour should recognise its pensions defeat – and drop mandation

There is a sensible rule to follow when watching politics: if a government tells you not to worry about a power it is looking to acquire, worry. When it tells you that power is only a reserve – a backstop of last resort – worry doubly.

That is part of the case against Clause 40 of the Pension Schemes Bill: the “mandation” provision that would give ministers the authority to direct pension funds to invest in assets of the government’s choosing. Torsten Bell, the pensions minister who has spent months insisting it is perfectly benign and the industry need not panic. He even told worried pension executives to “chillax”.

The House of Lords, thankfully, has shown it is not in the mood to chillax. Last week, peers voted to strip the mandation powers from the Bill, forcing the Commons to think again. It was a necessary intervention, and the government should heed it.

The objections here are about the foundations of how British pensions work. Pension trustees are bound by fiduciary duty to invest scheme assets in the best interests of their members. Tens of millions of savers depend on this principle. That principle is hollowed out the moment government ministers can dictate investments in specific assets. Trustees cannot serve both the members who rely on them, and a government with its own political priorities.

As shadow welfare secretary Helen Whately puts it to me: “It is simple really, I just don’t think the government should have a say over where people’s pensions are invested.” The Tories have said they would reverse any such plans.

Bell has attempted to offer a fig leaf to widespread industry concerns, claiming the Bill will be amended so that the mandate power only relates to the Mansion House Accord – the voluntary agreement under which pension providers agreed to target more in UK private markets. But that offer is not as reassuring as he appears to think.

The original agreement was voluntary precisely because it was conditional on trustees being satisfied it served their members’ interests. The weighing up could change if the government is sending the economy plummeting, for example. Mandation, however, would mean there isn’t an option. Fiduciary duty can’t be fulfilled.

What would this government use such powers for? Bell may have revealed as much at a recent event for sustainable investment when he announced Britain’s pension funds – the largest pool of long-term domestic capital in the country – must play a central role in delivering the transition to net zero.

The government, and that would include future governments led by who knows, could use pensions to fuel their own pet projects, no matter the likelihood of success. The draft legislation confers mandation powers on the government until 2035. Bell’s joke – that the solution to worrying about future governments abusing the power is simply to “never lose an election” – is deeply unfunny and should raise serious alarm bells.

What happens if people hear about this move and worry about the safety or trust they once had in their pension pots? People may think twice about adding into their savings, or even opt out of their auto-enrolment. “If people start losing confidence in the system and opt out of auto-enrolment,” the shadow welfare secretary adds, “that would be a huge setback. Most people don’t save enough as it is.”

There remains one simple question at the heart of all this: if the government is making UK assets genuinely attractive to pension funds, why would mandation ever be needed? The positive investment case for Britain should be able to make itself. During this government’s time in office it only seems to have been making that case harder.

The answer to unlocking investment is not ministers’ reserve powers. It is making the UK more attractive. Do that and pension funds will invest willingly. Fail to do them and no amount of legislative coercion will paper over the cracks – it will only lead to savers footing the bill.

As Whately says: “The government should recognise the resounding defeat [in the Lords] and take mandation out of the bill. We plan to fight this all the way.”

Good. The Lords have done British savers a favour. Ministers should listen to them, and drop this provision for good.