Here's what you can do instead with function parse
:
text <- paste("alpha^2%*%",parse(text=pretty10exp(factor,drop.1=T)),sep="")
text
[1] "alpha^2%*%10^-5" # which we then use as the expression in your call to legend
legend("topleft", legend=parse(text=text), pch=1, lty=1)
See ?parse
for more explanation on how this work.