Government confirms plans to review DC charge cap

In his Autumn Budget and Spending Review today (27 October) chancellor Rishi Sunak confirmed the government would "consult on further changes to the regulatory charge cap for pension schemes, unlocking institutional investment while protecting savers".

Documentation published alongside the budget said the consultation will, "before the end of the year", consider options to amend the scope of the cap so it can better accommodate well-designed performance fees to ensure savers can benefit from higher return investments, while unlocking institutional investment to support some of the UK's most innovative businesses.

It added the government would also continue wider policy work to understand and remove various barriers to illiquid investment.

Lane Clark & Peacock said the announcement "missed the point" on issues around DC scheme investment - noting that fees were already well below the charge cap for many schemes and there were a number of other issues to consider also.

Head of DC Laura Myers said: "There are a whole host of other concerns leading to industry reticence to invest in these assets, not least around issues regarding fairness for members and the opaque nature of illiquid assets.

"There is also the reality that many DC schemes invest via insurers who don't accept many illiquid assets so this won't be changed by the magic bullet of charge cap changes."

Myers added: "It's a missed opportunity to address perceived barriers and some industry nervousness."

Barnett Waddingham head of DC investment Sonia Kataora agreed there were issues with the plan. She said: "Firstly, workplace pension scheme charges are generally well under the existing cap, and although adjusting the cap (not just in terms of the level but the way charges are assessed) may assist with some investments, this doesn't tend to be the deciding factor for trustees when deciding whether a strategy creates good value for members.

"What's more, the savers who will likely be able to invest in infrastructure assets are younger members (given their long investment horizons) - those closer to retirement will need greater liquidity. We need to ensure this doesn't lead to an unfair charge hike for all members, or an intergenerational divide when it comes to fees and charges. Neither of these are a palatable solution, especially with the Department for Work and Pensions pushing hard for best value and fair charging to solve the UK's pensions crisis."

String of reviews

This comes after a string of government reviews into the charge cap and investment in illiquid investments over recent years - and comes as part from an ongoing government bid to encourage more DC schemes to invest in illiquid assets such as infrastructure and renewable energy as part of its levelling-up agenda.

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 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.