Chancellor of the exchequer Kwasi Kwarteng has announced that performance fees will be removed from the charge cap applied to defined contribution schemes, in a bid to spur pension scheme investment in science and technology.
Acknowledging the UK’s stagnant rate of economic growth, with the Bank of England having suggested in the run-up to his “mini-budget” that the UK may already be in recession, Kwarteng said that “to drive growth we need new sources of capital investment”.
“We will accelerate reforms to the pension charge cap, so that it will no longer apply to well-designed performance fees,” he continued.
“This will unlock pension fund investments into UK assets and into innovative, high-growth businesses.” He argued that these reforms would benefit UK savers and increase growth.
“We will provide up to £500mn to support new, innovative funds, and attract billions of additional pounds into UK science and technology scale-ups,” Kwarteng added.
The government’s “growth plan”, published alongside Kwarteng’s statement, introduced the “long-term investment for technology and science” competition.
This would provide up to £500mn “to support new funds designed to catalyse investment from pension schemes and other investors into the UK’s pioneering science and technology businesses”, it said.
‘Tinkering won’t move the dial’
Pension schemes — both defined benefit and DC — have come under increasing pressure from the government to invest in UK assets as part of its levelling up agenda.
In March, the government launched a consultation focused on encouraging DC schemes to invest in illiquid assets.
It included amendments to the statement of investment principles that would oblige DC schemes with more than £100mn in assets to explain their policies on illiquid investments.
It also proposed updating regulations around employer-related investments to enable master trusts to expand their investment strategies to include private debt and credit.
“I am determined to pursue the path to opening illiquid asset classes to DC schemes,” former pensions minister Guy Opperman said at the time. “I am firmly of the view that all DC schemes should be considering diversifying their portfolio.”
The government has now said that DC charge cap reforms will give schemes “the clarity and flexibility to invest in the UK’s most innovative businesses and productive assets creating opportunities to deliver higher returns for savers”.
It will introduce draft regulations to remove performance fees from the charge cap. The charge cap currently prevents DC schemes from applying annual charges of more than 0.75 per cent on a member’s pot.
Shula PR and Policy managing director Darren Philp was unconvinced by the idea.
“Changes to the charge cap to promote investment in productive finance are a red herring,” he told Pensions Expert.
“I’d be surprised if this would make even a marginal difference. Pension schemes will only invest if it’s the right thing to do for their members, and tinkering around the edges won’t move the dial.”
Meanwhile, Hargreaves Lansdown senior pension and retirement analyst Helen Morrissey claimed that cost had been a “major barrier” to UK pension scheme investment in illiquid assets.
“While the cap was brought in to ensure people got good value from their pension scheme, cost is not the only way of determining value,” she added.
Tim Middleton, director of policy and external affairs at the Pensions Management Institute, described the reforms as “a pragmatic step” towards making illiquid investment more appealing for DC schemes.
“However, we should not lose sight of trustees’ responsibilities to members,” he said.
“Their priority is to identify appropriate investment opportunities for members rather than to support specific sectors of the economy.
“Ultimately, if this innovation is to succeed it will be because science and technology would represent an appropriate investment and a legitimate alternative to existing assets.”
Alex Janiaud is deputy editor at Pensions Expert, FTAdviser's sister publication
