As promised, the government has included a reserve power in the Pension Schemes Bill that would allow it, in future, to set quantitative baseline asset allocation targets for some pension scheme investments: so-called “mandation”.

This idea has already attracted a lot of industry comment and seems bound to be a source of much debate as the Pension Schemes Bill works its way through Parliament.  There are a variety of different political and non-political perspectives here, and we are already aware of potential proposals to amend the Bill to further limit the reserve power or reduce its scope.

But it’s worth pausing for a moment to take a look at the power as included in the current Bill, in effect the draft law.  What does the legislative drafting actually tell us?

Based on the Bill as laid in Parliament on 5 June, here is a quick breakdown of some key points.  A note of caution – some readers may have strong views about some of what follows.

• The mandation power would apply to authorised DC master trusts and DC group personal pension schemes that are qualifying schemes used for automatic enrolment. It does not appear to apply to other types of scheme – for example single employer own trust schemes or DB schemes.  There is also scope for the government to grant exemptions through regulations.
• Mandatory asset allocations would apply to the default fund of these schemes. This is not necessarily the same as the scheme’s “main scale default arrangement” dealt with elsewhere in the Bill.
• The types of asset that could be mandated are known as “qualifying assets” but much of the detail is left to regulations. Whilst the Bill says public assets are out of scope, it only gives non-exhaustive examples of what assets are in scope; such as private equity, private debt and assets with appropriate links to the UK.  The regulation-making power is broad, so future governments could conceivably use it to mandate other asset types.
• The level of asset allocation is determined as a percentage by value of scheme assets.
• The exact percentage target is not specified; this too is left to regulations. In theory this could 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 there is a limited sunset on this: in effect the Bill says the government cannot increase the percentage after 31 December 2035.
• It is likely that regulations will also set details of how schemes should demonstrate they are complying with mandatory asset allocations. Statutory guidance may be provided.
• Industry regulators will have a role in “approving” schemes’ compliance with mandation. It appears that a failure to obtain approval would affect the scheme’s eligibility to be a qualifying scheme for automatic enrolment purposes.
• As well as (by definition) overriding investment duties under the common law, the Bill expressly says that mandation overrides any conflicting provisions in scheme rules. For lawyers this will not be a surprise.
• As a matter of procedural safeguard, before making the first set of regulations that implement mandation, the government must provide a report on the effects of the measures on members’ financial interests and UK growth (among other things), and the relevant minister must consult with HM Treasury.

It’s important to note that mandation will not become law immediately when the Pension Schemes Bill becomes an Act.  Separate regulations will be needed first in order to bring it into force and set out much of the detail of what is mandatory.  And of course the legislative drafting could well evolve as it goes through the Parliamentary process in the meantime.

The government has also said very publicly that it does not expect to use this mandation power, and hopes the industry will meet its expectations for UK investment in a voluntary way.  Many are already working towards this whilst staying conscious of the potential future political and legal position.

So, where does this leave us over the next few months?  Well, we don’t predict a riot, but we do predict some pretty robust conversations…