The Association of Investment Companies is calling on the government to review the defined contribution charge cap, saying it poses a barrier for schemes to invest in illiquid assets.
In its response to the Department for Work and Pensions consultation Investment Innovation and Future Consolidation, launched in February, the trade body stated investment companies which invest in specialist areas tend to have higher costs than those investing in listed equities.
According to Ian Sayers, AIC’s chief executive, said a more flexible approach would help facilitate greater investment by occupational DC schemes in illiquid assets, and thus enable more investors to "access the potential benefits".
Since 2015, providers have had to cap the charges within default funds to 0.75 per cent of funds under management per year.
The government has stated the cap is working broadly as intended and has helped drive down costs for members.
However, as the government is considering how to direct some of the £60bn held in DC schemes into alternative illiquid investments to boost the UK economy, the DWP asked in the consultation if the cap was a barrier to invest in certain asset classes.
The AIC made several proposals to review the charge cap.
These included that the cap should apply only to holdings where the underlying investments are quoted securities.
It stated: "The AIC recommends that the overall structure of the cap be modified to allow for a certain proportion of the scheme’s assets, say up to 25 per cent, to be held under different arrangements where they offer underlying exposure to illiquid assets/patient capital."
Alternatively, a higher charge cap could be set, it added.
Mr Sayers noted, however, it is good that the government is exploring how occupational DC pension schemes can invest more in illiquid assets.
He said: "Assets like private equity, infrastructure, property and debt can play a powerful role in investors’ portfolios with the potential to generate higher returns and income.
"These benefits should be available to those saving for their retirement through pension schemes, not just those ‘in the know’."
However, the AIC doesn’t agree with the consultation’s conclusion that "a wide range of illiquid assets will not be available to smaller DC occupational schemes".
Mr Sayers said: "Any DC scheme can gain ready exposure to illiquid assets with investment companies. As listed companies, investment companies trade throughout the day offering liquidity and their closed-ended structure makes them ideal for holding illiquid assets.
"The consultation points out that there are 1,080 DC schemes with between 12 and 999 members and that these schemes have average assets of less than £3m. These schemes could be a perfect fit to gain exposure to illiquid assets through investment companies.
"Investors in smaller schemes should not have to miss out on the opportunities which illiquid assets present due to scale when a solution exists."
maria.espadinha@ft.com
