The government has launched its controversial consultation on removing performance-based fees from the 0.75% charge cap that applies to defined contribution default funds.

The aim of the proposed change is to encourage DC investments in illiquid assets, which often come with higher fees, in the hope that this would support greater investment in assets like infrastructure and property, and potentially the UK’s recovery. 

 

The Department for Work and Pensions last called for evidence on the charge cap in June last year. In this year’s Autumn Budget in October, the Treasury had said there would be another consultation about the cap before the end of the year “to enable pension savers to benefit from better growth in their long-term investments”. The consultation would be looking at the scope for the cap “to better accommodate well-designed performance fees and enable investments into the UK’s most productive assets, while continuing to protect savers". 

 

Pensions minister Guy Opperman claimed that DC trustees of DC were increasingly looking to private markets because of diversification and greater returns. 

 

“Investment in asset classes like green infrastructure, private equity and venture capital, fits well with the long-term horizons of DC schemes. Such investments have the potential to provide better returns for members as part of a balanced portfolio and help to sustain employment, our communities and the environment,” said Opperman, adding that the greater flexibility proposed would not preclude protecting savers from “predatory” charges. 

 

Keeping “well-designed” performance fees out of the cap “will give schemes the flexibility and freedom to pay performance-based fees, if they think this will be in the financial interest of members”, he said.  

 

Conscious of the reservations among trustees over changing a regulatory cap to accommodate high charging products, he added: “At the same time, it is essential that members continue to be protected... the charge cap continues to serve an important role.” 

 
Is daily pricing the real barrier?

Industry had previously highlighted that changing the charge cap was a somewhat clumsy way of addressing the barriers to illiquid investment among DC schemes, which revolve more around the valuation of such investments given the practice of allowing daily trading. A lack of transparency around performance-based fees is another concern for trustees, according to some consultants. 

 

Former pensions minister Baroness Ros Altmann has previously suggested that changing the charge cap would be a poorly thought out policy measure, pointing out that most schemes already pay much less than 0.75% on their default, giving ample room for extra fees, and that daily pricing was a much bigger barrier.  

 

She suggested that defined benefit schemes – some of which still have a relatively long time horizon – would be better placed to invest in illiquids but are loath to do so because of regulatory pressure to derisk. 

 

Alongside diluting the charge cap, the government is increasing pressure on DC schemes to consolidate; while the Pensions Regulator sees improved governance as a key goal in doing so, the government also has an eye on the investment options available to large investors like DC master trusts. 

 

The Treasury’s latest attempt to promote pension investment in illiquids is part of a long line of similar efforts made by former chancellors seeking to promote ‘patient capital’ or infrastructure, which variously focused on the charge cap or consolidation. In 2017, former chancellor Philip Hammond started looking at the charge cap, while his predecessor George Osborne had mandated pooling of the assets of local authority pension funds. 

The consultation performance fees and the charge cap closes on 18 January.

 
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