Andrew Bailey, governor of the Bank of England, has registered his opposition to Government plans to set asset allocation targets for pensions under its new Pension Schemes Bill.

Under the new so-called 'megafund pension' rules to be outlined in the new Bill, the Government will keep a ‘reserve power’ to set ‘binding asset allocation targets’ for multi-employer master trusts.

The backstop included within the Bill, which was debated in the House of Commons for the first time on Monday, could force schemes to invest a minimum proportion in assets such as UK infrastructure and UK private markets.

The aim would be to boost pension investment in the UK.

Mr Bailey told the Press Association at the Bank of England’s latest Financial Stability Report presentation that he does not think a mandate is appropriate.

He said: “We’ve had a low level of pension fund investment in the economy and I think structural changes to the pension industry are helpful in this effect. However, I do not support mandating, I don’t think that’s appropriate.”

However, he did agree that pensions need reform.

He said: “I think reforming the pensions industry does require a lot of heavy lifting but it needs to be done.”

Such a statement from the Bank of England governor against Government policy is unusual, with the Bank usually keeping mum when it comes to politics.

The proposed mandate is part of Government plans to boost allocations to private assets to reverse long-term falls in pension scheme investment in the UK.

Investment by UK pension funds in the UK has fallen sharply, according to Treasury figures. In 2023 around 20% of UK DC scheme assets were invested in the UK in comparison to 50% in 2012.

The Treasury believes that combined multi-employer “megafunds” will lead to over £50bn of investment in UK infrastructure and other assets, as well as driving higher returns for savers. It claims that the average earner could get a £6,000 boost to their pension pots at retirement "from consolidation alone."

The Mansion House Accord saw 17 pension funds already agree to allocate at least 5% of their assets to the UK by 2030. They committed to giving the Government the power to enforce this domestic investment should their voluntary allocations fall short of the 5%.

Despite the Accord, the idea of enforced investment in UK assets for UK pension funds has received substantial opposition from many industry commentators.

Former Pensions Minister and LCP partner Steve Webb agreed that the mandate would be “crossing a line.”

He said: “The governor will not have chosen lightly to be so critical of government policy, and his ‘nuclear’ intervention will be very unwelcome at DWP.  But the governor speaks for many in thinking that the government is crossing a line if it presses ahead with plans to tell pension schemes how to invest. 

“Whilst pension assets can certainly be used more productively, it is ultimately for the trustees of pension schemes to decide how to invest in the best interests of their members, and not for ministers to tell them how to invest. This challenge raises serious questions about whether this policy will survive scrutiny in the House of Commons and House of Lords over the coming months”.