Is Sunak hell-bent on diluting the DC charge cap?
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Chancellor Rishi Sunak and secretary of state for work and pensions Therese Coffey are said to be proposing changes to the DC default charge cap to partially exclude performance fees, the Financial Times reported on Thursday.
In June, the Department for Work and Pensions responded to a consultation on incorporating performance fees within the charge cap. It did not exclude performance fees from the cap but went ahead with regulations that allow schemes to smooth performance fees over five years. The new rules came into force at the start of this month.
The DC charge cap of 0.75% has long been a thorn in the chancellor's side; as the government has taken on record peacetime debt to tide the economy over during the Covid pandemic, he is looking to encourage pensions money into illiquid assets to support the UK's economic recovery.
The Treasury previously launched a productive finance working group with the Bank of England and the Financial Conduct Authority, to look at removing barriers for DC investment into long-term assets. Sunak, together with the prime minister, has also called for an 'investment big bang' by pension funds to support the green transition and help with the 'build back better' agenda.
However, even if performance fees are removed from the charge cap, it is unclear if the UK economy would benefit. UK pension trustees are bound by law to invest in the interest of their members and usually spread members' assets across the global economy.
In June, the Department for Work and Pensions responded to a consultation on incorporating performance fees within the charge cap. It did not exclude performance fees from the cap but went ahead with regulations that allow schemes to smooth performance fees over five years. The new rules came into force at the start of this month.
The DC charge cap of 0.75% has long been a thorn in the chancellor's side; as the government has taken on record peacetime debt to tide the economy over during the Covid pandemic, he is looking to encourage pensions money into illiquid assets to support the UK's economic recovery.
The Treasury previously launched a productive finance working group with the Bank of England and the Financial Conduct Authority, to look at removing barriers for DC investment into long-term assets. Sunak, together with the prime minister, has also called for an 'investment big bang' by pension funds to support the green transition and help with the 'build back better' agenda.
However, even if performance fees are removed from the charge cap, it is unclear if the UK economy would benefit. UK pension trustees are bound by law to invest in the interest of their members and usually spread members' assets across the global economy.
Investment firms welcome proposals
Investment firms are, perhaps unsurprisingly, not opposed to permitting higher charging investments in default funds, but point to other practical barriers in DC.
"It is encouraging that the government is considering how it can better incentivise pensions funds to invest in its 'levelling up' agenda," said Kerrin Rosenberg, CEO of pensions investment and advisory firm Cardano UK.
However, he noted that the practice of daily liquidity prevents long-term investment in illiquids. "This is crazy, as most DC members will not be transferring the pensions and some exposure to illiquid assets could meet their long term investment needs well," he argued.
"Dropping daily liquidity, pricing requirements and other impediments such as the very tight cap in investment costs imposed on auto-enrolment schemes could unlock a significant pool of funding. Illiquid investments typically come at a higher cost than their more liquid comparatives, which is not to say that these charge caps should be raised for all investments, liquid investments can be done at much lower costs. But if governments could incentivise a portion of clients’ portfolios that could bear illiquidity and higher fees, that would be very helpful to those considering investing in ‘levelling-up’ projects," Rosenberg said.
At investment platform Hargreaves Lansdown, Helen Morrissey, senior pensions and retirement analyst, said: “We support moves to make it easier for scheme members to invest in more illiquid assets like infrastructure and private equity."
She said that cost was not the only driver of value, an argument often made by the government as part of a narrative that there had been 'excessive focus on costs and charges'.
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