The Department for Work and Pensions has launched a consultation that will seek out policy proposals to exclude investment performance fees from the defined contribution charge cap.
Such performance fees, which are only payable to an investment manager if they generate high returns on their investments, are often found in private markets assets like venture capital, and are currently included within the DC scheme charge cap.
The charge cap is set at 0.75 per cent on the default arrangement of certain employer pension schemes.
The DWP said if performance fees are excluded from the charge cap, schemes – if they choose to utilise it – “could overcome barriers to long-term investment”, and “provide new opportunities to invest in areas such as British businesses and green projects”.
The consultation follows the announcement by chancellor of the exchequer Rishi Sunak in October that the government would consult “within the next month” on further changes to the charge cap, with the goal to encourage more investment in illiquid assets by DC schemes.
As part of the consultation, the government said it also wanted to explore the impact changes to this area could have on member protection and helping to deliver better outcomes for savers, while seeking on policy design so member protections are maintained.
Minister for pensions and financial inclusion Guy Opperman said: “As automatic enrolment has developed, we have always wanted to ensure the best outcomes for members.
“This consultation will look at ways to enable schemes to take advantage of long-term, illiquid investment opportunities and provide better returns for members.
“Lifting these barriers can also help contribute to the key role finance has in tackling climate change, by mobilising private finance towards clean and resilient growth and addressing market barriers to longer-term investing in green projects.”
‘Charge cap protects consumers’
Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, noted that while the industry body welcomes the intent to make it easier for DC schemes to invest in a wider range of assets and illiquid investments, it “has not seen any compelling evidence to suggest that raising the current DC default charge cap of 0.75 per cent will result in any material change in the volume of investment in illiquids”.
He said: “A focus by employers on securing low-cost provision in a competitive market; the prudent person principle, which requires schemes to take careful consideration of risk and reward; and operational barriers, such as the flexibility to move pots when requested and daily dealing, result in only a very low proportion of scheme investment in such assets.
“Recent proposals to allow for a smoothing of costs over a five-year period may alter this in time, but it is too early to tell.”
He added that “overcoming behavioural barriers will require regulatory consistency, and whilst finding the right solution is sensible, it is surprising to see that recent proposals to allow for a smoothing of costs over a five-year period may be abandoned, before they have had time to take effect”.