The Society of Pension Professionals has called a threat of mandation, as included in the pension schemes bill, “the worst of both worlds” as it creates legal uncertainty, and cites an example from China to illustrate the effects of central government directing investments.

The Society has welcomed the pension schemes bill but takes issue with the temporary powers for government to mandate investment in productive finance if it deems this necessary.

A mere threat will lead to confusion around decision making, with trustees uncertain to what extent they should take it into account or how it interacts with their fiduciary duty, the SPP said in a paper published on Thursday, ‘Power in principle? Balancing mandation and market confidence’.

Simon Daniel, who chairs the SPP investment committee, said: “This SPP paper sets out that there are arguments to either mandate or not mandate but, while the SPP’s preference is for the latter, having the mere threat of mandation is viewed by many as the worst of both worlds.”

The SPP also criticised the lack of clarity around the type of assets that would be classed as ‘productive’, as well as the unanswered question of liability if government-mandated investments underperform for scheme members.

Like Pensions UK, the Society highlights the risk of market distortion and misallocation of capital if an entire section of investors is obliged to buy very specific assets, potentially having to sell other assets at the same time. The SPP compares this with China, giving the example of the communist country’s 2008 decision to fund property and infrastructure, resulting in inflated prices as well as ghost towns. Conservative MP Kit Malthouse last month called the mandation power proposal "chillingly dirigiste".

The SPP also points to issues around the time limitation of the threat to 2035, saying its members have mixed views about this.

“SPP is aware that some critics are calling for this to be brought forward to the end of the parliamentary term, and there is a logical argument for doing so. However, these changes will take time to bed in and will require master trust and group personal pension schemes to have a least £25bn in assets by 2030, or a credible pathway to being there by 2035,” the paper reads. “On balance, the SPP agrees that if the mandation provision is retained, it makes sense to have a 2035 expiration date.”