The House of Lords has voted for an amendment that removes powers to mandate investments for defined contribution schemes from the pension schemes bill. Exemptions from the scale requirements, a requirement on government to have regard to competition and innovation, and an extension to the dormancy period of small pots have also been voted in. The bill will return to the House of Commons, which could overturn the decisions.

The amendment that strips the bill of ministers’ temporary investment mandation power was brought by Baroness Sharon Bowles, who said she opposes government intervention out of principle and that “the track record of intervention is not good”. 

The LibDem peer said that if industry does not deliver on the Mansion House Accord, “it will not be out of obstinacy; it will be because the opportunities are not there at the right price or at the right risk.” 

Under the bill, trustees can seek to avoid government mandation if they can show it would cause ‘material detriment’ to members, but Baroness Bowles argued that 'material detriment' creates a very high bar for trustees who are already duty-bound to act in members’ interest. 

“The power itself is extraordinarily broad. There is no time limit, no percentage, no end date, and a rather dodgy exemplary asset list—available to any future fancy. Nothing prevents a government from choosing their preferred assets, including those that no one else will touch, and compelling 22m savers to invest in them,” she said. 

Pensions minister Torsten Bell has stressed the government does not intend to use the power, noted Richard Gilbey, Lord Vaux, but said: “It does not need to be used; its very existence is, in effect, mandation.”  

He said the minister had never given an adequate response to the question of who should bear the risk if the government-mandated assets result in poor performance. He also argued that what ministers have said the government can mandate differs from the bill’s wording: “I stress that it says 'an asset', not just a class of assets... Contrary to what the minister has told us, specific assets or projects can be prescribed.” 

The Department for Work and Pensions’ minister in the Lords, Baroness Maeve Sherlock, retorted that there was a “collective failure” in how DC schemes invest, saying market dynamics mean providers tend to keep costs low and wait for others to move first. 

“The government are under no illusions about the significance of this power,” she said. “It is a substantial intervention and, if we ever found the need to use it, we would have to proceed with great care.” 

She said ministers would still be required to act rationally and in line with the European Convention on Human Rights. 

The minister argued that mandation powers form a “package” with the scale test, the value-for-money framework and small pot consolidation: “Together, they are designed to deliver a step change in outcomes for millions of pension savers. If we remove the reserve power, we remove the mechanism that gives the rest of this framework its teeth when it comes to investment diversification.”  

While there are strong views on state direction of privately owned pension assets in the Lords, there is likely to be very limited interest in the House of Commons – where the government has a large majority. 

The government will override the House of Lords' decision “asap”, said former pensions minister Guy Opperman on LinkedIn. “If anyone thinks [government] will back down on mandation then I have a bridge to sell you,” he wrote. “It is possible they will make a stage 1 minimal concession, but the core principle will stay 100%.” 

He cited Labour’s “massive majority” and its MPs’ focus on issues like welfare, adding: “The Lords votes are effectively advisory only. The Commons is elected and they will prevail.” 

The vote sends a signal to the government, however. Baroness Ros Altmann, who also spoke in favour of removing the mandation power from the bill, told mallowstreet: “The verdict of the House of Lords is abundantly clear. We are alerting the government to the real dangers of proceeding with its current proposals, and I hope they will listen to the warnings and accept that these amendments would improve the impacts of this bill on member outcomes.”

The amendment was welcomed by pension fund association Pensions UK. Zoe Alexander, executive director of policy and advocacy, called it “a win for savers”.  

“Having the power on the statute book would expose millions of workers’ retirement savings to political cycles and undermine the duty of pension trustees to act at all times in the interests of savers,” Alexander said. 

The group’s preferred method to drive investment in UK markets would be a voluntary approach supported by improvements to the investment environment, she explained, such as the Mansion House Accord. 

The Pensions Management Institute also expressed satisfaction with the outcome of the vote. Chief strategy officer Helen Forrest Hall said: "Mandating how schemes invest [risks] exposing savers’ pensions to political influence and weakening trustees’ fiduciary duty to act solely in members’ interests. Removing the power helps protect the independence and professionalism that underpin good outcomes for savers.” 

She said there are many measures in the bill giving “meaningful opportunities to strengthen the system”, suggesting the government had better concentrate on these: “The PMI urges the government to focus now on their successful implementation, and we look forward to working with them and industry to achieve this.”  

The House of Lords’ decision is a very positive step, said Louise Davey, a trustee director who heads up policy and external affairs at trustee firm Independent Governance Group.  

“Mandating how pension schemes invest risks setting an unhelpful precedent and contradicts the core principle that trustees must act in the best interests of their members, consistent with their fiduciary duties,” she said.  

To boost UK investment, the focus should be on enabling, not directing, she added. 

“The industry is supportive of the broader ambition to drive growth, but this is best achieved through collaboration and market-led solutions, rather than legislative intervention,” she said.  

The amendment on DC investment mandation was not the only one to be voted in. The Upper House was also in favour of extending the definition of ‘dormant’ for small pot consolidation purposes to three years, from the 12 months proposed by government, saying pots could be inactive for a year if someone takes a break from work without being ‘dormant’.  

They also approved an amendment that would create an exemption from the DC scale test of £25bn based on net risk-adjusted investment performance.

An amendment that would require the government to have regard to innovation and competition when regulating for scale and new market entrants was equally voted in.