The Department for Work and Pensions is consulting on requiring DC pension schemes to 'disclose and explain’ their policies on illiquids, after receiving mixed feedback on its proposal to remove performance fees from the DC charge cap. The government also wants schemes with over £100m to disclose their asset allocation in the chair's statement. A summary of responses to its call for evidence on barriers to DC consolidation showed mixed views.

 

Disclosing their policies on illiquid assets “is something many schemes already report, but we believe that making this a requirement would result in a significant shift in the mindset of pension schemes, their trustees and ensure consistency”, said pensions minister Guy Opperman. By providing this information to members, employers, consultants, trustees and the market at-large, he said the government hopes to “continue to encourage competition based on overall value and as holistic a range of data as possible”. 

 

The proposals to ‘disclose and explain’ illiquid investments were made after the DWP received very mixed responses to its consultation on removing performance fees from the default charge cap of 0.75% in an attempt to encourage funds to invest in ‘productive finance’, which is one of the aims of the Treasury.  

 

The department is now proposing to require DC schemes to include an explanatory statement on their policy towards investment in illiquid assets in their triennial SIPs.  

 

While investment organisations were broadly in favour of taking performance fees out of the charge cap, consumer organisations were against watering down the protections. The department has “taken on board the mixed reaction to this proposed change” but added that it was pleased with some respondents expressing the view that such changes could lead to “greater engagement between pension schemes and the investment community”, claiming that this “may currently appear stalled”. 

 

Though the DWP said it recognised that the proposed change was not supported across the entirety of the pensions sector and other interested groups, “we believe, it is important for the government to take time to fully understand all the concerns raised, engage further, and to explore how these concerns might be addressed in the design of the policy as we pursue this further”. It said the concerns “mean any reforms should be careful but precise”.  

 

The government had proposed to only exempt ‘well-designed’ performance fees that are paid when an asset manager exceeds pre-determined performance targets, but said now it recognises that “all performance fees are not created equal”, and plans to consult on principle-based draft guidance alongside any proposed consultation on draft regulations. 

 

The DWP is also consulting on changing the rules on employer-related investments, claiming that the current restrictions - a ban on certain loans to an employer, a 5% limit, and for multi-employer schemes, a 5% limit on investment in any one participating employer with a cap of 20% on the total amount of a scheme’s assets that are invested in ERI – could prevent DC master trusts from investing in private debt or private credit. 

 

In addition, it wants to require DC schemes with over £100m assets under management to disclose in the chair’s statement the percentage of assets allocated in the default to cash, bonds, listed equities, private equity including venture capital and growth equity, property, infrastructure and private debt. 

 

 

The government is keen to see DC schemes consolidate, and consulted on barriers to this last year. The DWP has now said that it has receive mixed evidence. 

“Some stakeholders, supportive of the benefits of allocation to illiquid assets, believed that members of smaller schemes were suffering from a limited set of possible investment opportunities as a result of a narrow decision by the scheme’s trustees to continue to offer a corporate scheme. Other stakeholders suggested that the proposed benefits of consolidation were in fact overstated and the costs and risks poorly understood as well as the benefits of corporate schemes,” it noted. 

 

Many highlighted a disruption within the market if consolidation was forced too quickly, it added. “The consensus was for government to slow down the process to ensure better member outcomes are being achieved,” it said, and respondents recommended that the DWP should wait to understand the impact of the new value for member assessments by small schemes before embarking on new policy ideas that might apply to schemes above £100m.