Govt pledges to 'consider' pension charge cap criticism

Govt pledges to 'consider' pension charge cap criticism
Pensions minister Guy Opperman said 2022 would be a 'seminal' year for value for money in pensions

The government has said it will "take time to consider" industry concerns around its proposals to exclude performance fees from the charge cap.

Excluding performance fees from the charge cap of 0.75 per cent is seen as a way of encouraging defined contribution schemes to invest in illiquid assets since these assets often use theses fees.

Experts were cool on the proposals, however, and the government’s response to the consultation noted the mixed response and said this would be considered.

And to further push forward its bid to encourage DC schemes to invest in illiquid assets, the government has today launched a combined consultation on other ways it can achieve this.

The new consultation includes amendments to the statement of investment principles that would require DC schemes with more than £100m in assets to disclose and explain their policies on illiquid investments.

It also proposes updating regulations around employer-related investments to enable master trusts to expand their investment strategies to include private debt/credit, while confirming there will be no further regulations this year with the “sole purpose” of encouraging DC consolidation.

In his foreword to the consultation, pensions minister Guy Opperman said 2022 would be a “seminal year” for value for money in DC, with schemes disclosing their investment performance “for the first time” and small schemes subjected to a “rigorous assessment” to determine whether they offered good value to their members.

“Whilst this work continues, I am determined to pursue the path to opening illiquid asset classes to DC schemes. I am firmly of the view that all DC schemes should be considering diversifying their portfolio,” he said. 

“Ensuring the DC market is fit for the future is a key priority. Innovating the DC investment offer, maintaining appropriate protection for automatically enrolled savers and improving the member experience can be achieved simultaneously if we work in a collaborative, open way.”

Charge cap changes rebuffed

Proposals to exclude performance fees from the charge cap were put to consultation in November last year, the rationale being that these fees act as a barrier to greater DC investment in illiquids.

The charge cap is currently set at 0.75 per cent and performance fees, often applied to private market assets like venture capital, are payable when investment managers generate high returns.

The Department for Work and Pensions said at the time that excluding performance fees “could overcome barriers to long-term investments” and “provide new opportunities to invest in areas such as British businesses and green projects”, something the government has long been keen to champion as part of the post-Covid-19 recovery plans and its “build back better” agenda.

“Broadly, the responses received from the financial services sector and some master trusts welcomed the proposal. They reported that the charge cap currently limits DC schemes’ ability to invest in illiquid assets that come with performance fees,” the government’s response explained.

But other master trusts, along with trustees’ services and legal advisory bodies, said the proposed change was unlikely to incentivise DC schemes to change their current approach, while some warned it might even be counter-productive.