Government mulling further DC charge cap proposals

Yesterday evening (13 October), the Financial Times reported the government was working on proposals to dilute the 0.75% ceiling on annual management fees in a bid to get schemes to invest more in long-term projects such as infrastructure schemes, renewable energy projects and innovative tech firms - investments commonly managed by private equity and venture capital firms, which often charge fees higher than the charge cap.

The article continued to note that performance fees would not be removed from the charge cap in their entirety, however, and any consultation would "seek a balance" that encouraged investment in illiquid assets with the potential for greater return.

This comes after the government has conducted a string of reviews into the charge cap and investment in illiquid investments over recent years.

In February 2019, the Department for Work and Pensions (DWP) launched a consultation on the consideration of illiquid assets and the development of scale in occupational DC schemes.

Last June, the DWP launched a review into the default fund charge cap - a review which concluded in January this year with it deciding not to make any changes at the current time.

As part of its Spring Budget, published on 3 March, the Treasury said it would consult again on DC investments - saying it wanted to encourage schemes to invest in "high-growth companies" and would seek to make it easier to do so under the auto-enrolment (AE) charge cap of 0.75%.

In its Plan for Growth, the government said it wanted to remove disincentives for institutional investors, particularly DC schemes, to investing in a broader range of assets.

Following this, on 19 March, the DWP launched a consultation on how to incorporate performance fees within the charge cap.

The DWP's response to both its February 2019 and March 2021 consultations were published this summer (21 June) - a response which brought forward measures to, among other things, amend regulations to better enable schemes to pay performance fees, rule changes that came into force earlier this month.

This comes on top of work done by other bodies - including the Productive Finance Working Group, which published a report in September putting forward a number of recommendations on DC investment one of which looked at widening access to less liquid assets.

Fundamental issues

Cardano UK chief executive Kerrin Rosenberg said it was "encouraging" the government was considering how it can better incentivise pensions funds to invest in its 'levelling up' agenda but said there were challenges.

He said: "One fundamental issue is the extent to which trustees can hold unlisted investments. Most ‘levelling-up' assets such as large infrastructure projects are private, and require a long-term time frame. This is where UK pension funds are more challenged.

"The DC market seems to have converged to market practice that demands daily liquidity. This is done to allow members a choice, at all times, to switch their investments to another provider. Most trustees of DC schemes insist, therefore, that all assets are fully liquid and have a daily price. This is crazy, as most DC members will not be transferring the pensions and some exposure to illiquid assets could meet their long-term investment needs well."

Rosenberg added: "Dropping daily liquidity, pricing requirements and other impediments such as the very tight cap in investment costs imposed on AE schemes, could unlock a significant pool of funding. Illiquid investments typically come at a higher cost than their more liquid comparatives, which is not to say that these charge caps should be raised for all investments, liquid investments can be done at much lower costs.

"But if governments could incentivise a portion of clients' portfolios that could bear illiquidity and higher fees, that would be very helpful to those considering investing in ‘levelling-up' projects."