Rachel Reeves is set to damage confidence in the private pensions system with new laws giving her the power to decide how workers’ money is invested, industry leaders have warned. The Chancellor’s proposed changes “may erode public confidence” in pension schemes used by millions of people to save for retirement, said the Society of Pension Professionals (SPP).

Ms Reeves has set out plans to ensure more of the £600 billion invested in workplace “defined contribution” pensions is spent in the UK, including on infrastructure projects. The Government’s Pension Schemes Bill will give Ministers the power to require British funds to invest a certain proportion of the money they hold either in the UK or in assets that benefit the British economy.

It will affect millions of workers who pay a portion of their salary into defined contribution schemes each month. The size of their pension pot, used in most cases to provide an income once they retire, depends partly on how much they save over the years but also on how the money is invested by fund managers.

Ms Reeves has said she is “confident that I will not need to use that power” because she hopes managers agree to change their investments voluntarily, but will hold it in reserve in case they refuse.

It’s part of her efforts to grow the British economy but the Society of Pension Professionals warned that the policy could discourage people from putting money into a pension.

The trade body said in a report: “If the government decides to mandate how pension schemes should invest, or merely threatens this by introducing the power to do so, it is reasonable to conclude that scheme members or those thinking of saving in a pension, may worry that saver returns are no longer the main priority, that how much they get back may be affected as a result, that pensions have become a tool for government agendas (not just this government but future governments too) and that ultimately, investments are being made for the interest of the government of the day, not for individual benefit and security.”

It added: “Any such perception may erode public confidence, particularly among those who rightly view pensions as private, long-term savings vehicles, not capital pools designed to plug gaps in public finance and investment.”

And the Society also warned that the plan could lead to “the creation of ghost towns, roads to nowhere and the artificial inflation of land and property”, with funds pressured to invest in infrastructure projects whether they made commercial sense or not.

Simon Daniel, Chair of society’s Investment Committee, said: “The Pension Schemes Bill has been broadly welcomed by the diverse range of the SPP’s members but the inclusion of a time limited power to compel pension funds to invest in a certain way, if they fail to do so voluntarily, is a measure that does not have the SPP’s support.”

It follows warnings from other industry bodies, including the Pension and Lifetime Savings Association and Association of Professional Pension Trustees, that the Chancellor’s plan could backfire.

In her Mansion House speech in July, Ms Reeves said: “We have a duty to maximise the potential of people’s pension savings and our Bill reserves the power to mandate pension funds to invest productively in a wider range of assets, sending a clear signal that pension funds and this government are united in our determination to deliver higher returns for savers and more investment for the economy.

“But I am confident that I will not need to use that power, because firms see the urgency and importance of this as clearly as I do.”