Sweeping government reforms are set to change the face of the UK’s workplace retirement schemes. Out with the rigid DC default schemes, beholden to charge caps and expectations of daily liquidity, and in with investment strategies free to invest more widely, with a focus on delivering value for money.
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Specifically, the new Pension Scheme Bill is designed to encourage DC schemes to invest in private markets, predominantly those investing in the UK, simultaneously supporting the nation’s growth ambitions while delivering better outcomes for members.
Yet there is no such thing as a free investment lunch, and with greater access to private markets with their necessary sophistication, expertise and complexity, comes an inevitable increase in fees.
At a recent round table event discussing the role of private market assets in DC pensions, delegates debated the challenge for providers, advisers and trustees in finding a fee structure that is palatable to both employers and members and succeeds in delivering value for money.
Joe Howley, investment consultant at XPS Pension Group, said: “Private markets investments are not set and forget strategies; we need to know which assets are going to deliver for members in terms of return, diversification, and crucially fees. How do we make sure that members gain the best value for money? We’ve got to try and figure out as an industry, and it will take a few years to work through.”
The June 2025 Corporate Adviser Private Markets report finds just over one-fifth (22 per cent) of advisers are ‘very comfortable’ with the higher costs of investing in private market assets, while 59 per cent say they are ‘fairly comfortable’.
However, more than half (56 per cent) of advisers predict that employers will only accept an increase of 5 to 10 basis points in fees to accommodate a private markets allocation.
Accepting performance fees
The reality of moving to performance fees is also contentious for a DC market used to set annual management fees, which are capped in default schemes.
Corporate Adviser’s Private Markets report finds 55 per cent of advisers believe performance fees should be allowed in DC schemes.
Joachim Sudre, client solutions director at Aviva Investors, said: “Attitudes to fees change on a case-by-case basis, but simpler flat fees tend to be preferred by DC investors. That can be complex to apply when there are different layers of costs to consider within private markets, for example acquisition fees within real estate.”
Joanne Fairbairn, client director at Zedra, welcomed a straightforward approach to charges, but added members should not sacrifice returns for the sake of simplicity.
Fairbairn said: “It’s always nice to have simple solutions to explain to members and for reporting and governance purposes, but actually, I wouldn’t exclude paying performance fees if it means getting better returns.”
Martin Dietz, head of diversified strategies at Legal & General, warned that dismissing performance fees could restrict DC schemes’ ability to attract the best private markets managers.
“We have tried to limit the application or use of performance fees, but we have not drawn a red line. Private markets is an area used to performance fees, and if you say you are never going to accept them, you shrink your investment universe potentially, and that is not in the interest of the underlying members,” Dietz added.
Aligning interests
Dietz also made the point that, if constructed correctly, performance fees align the investment team with the member, which he says “makes managers really focused on delivering returns”.
James Monk, investment director for workplace investing at Fidelity, agreed that accepting performance fees both opens the market and provides essential alignment between manager and investor.
“We absolutely don’t exclude performance fees. There are huge swathes of the private markets sector that see performance fees as non-negotiable, so accepting them is about gaining access to quality managers,” Monk said.
Umang Rajbhandari, investment consultant at Barnett Waddingham, said he favours the performance fee model over annual management charges, but noted that trustees and employers should use their ever-increasing fund sizes to demand better terms.
“DC schemes are gaining more power to negotiate on fees. There is a lot of money going in there, which means there is more influence,” Rajbhandari added.
The way fees are applied to schemes varies across providers, a factor Alison Leslie, partner and head of DC investment services at Hymans Robertson, said makes price comparisons a challenge.
“I still see polarisation from trustees in their attitudes to performance fees. I also see different ways of treating them. Some providers include them within the member charge, some don’t, and then there’s a spectrum in how they are applied. You need to be careful to make sure that you’re comparing like with like.”
Paul Francis, principal investment consultant at Quantum Advisory, said advisers need to interrogate fee structures and ensure they are not obscuring hidden costs.
“The devil is in the detail on performance fees, particularly in how they are structured. You need to look at the agreements and see where the hurdles are, what the benchmark is, and what period it works over, because that headline rate might be different to what you’re going to pay in the end.”
Multiple defaults
Switching members successfully from existing lower costs DC default to more costly arrangements containing private markets, will require some deft communication, particularly where there are multiple defaults on offer.
The panel discussed the practicalities of running multiple default arrangements, and the pros and cons of giving members choice between different price points.
Dietz said: “We want to give people a choice; nobody’s being forced to pay the higher fees. We offer a higher fee default fund that has a material allocation to private markets. We have seen lots of support from advisers and consultants for this new strategy and in turn lots of clients have selected this fund. Others want to wait and see how the strategy performs.”
However, Adam Fisher, senior DC investment consultant at Isio, questioned whether offering additional defaults was valuable to members.
“If we start having multiple defaults to cater to private markets, when do we stop? Every time something new comes along do we build a new default?”
He continued: “There are a lot of legacy investment strategies in the contract-based DC world that still target annuities, and these need to be sorted. There’s a potential that we can lose members because we’re building new things and there isn’t the governance to oversee a shift in strategy.”
Given the high levels of inertia and lack of active engagement from members in their DC schemes, Monk noted that it is incumbent on providers to stand by their decision to invest in private markets – and the necessary increases in costs this brings – and focus on delivering value for money.
“Members look to providers to provide the best possible solution for them. It is beholden to us to try and deliver that and show courage in our convictions. Ultimately, most members don’t necessarily have a preference for investing in private assets or not. It is important that we deliver strategies that provide better outcomes for our membership; that’s the whole purpose of the new value-for-money framework.”
Yet, Fisher noted that providers will face obstacles in convincing cost-conscious employers of the value in paying more for private market allocations.
“When provider selections are trustee led, cost comes further down the list of considerations. When it is employer led, there is a natural inclination to focus on how much they can negotiate fees down. They might be the wrong way of looking at it, but it is the reality.”
Competitive playing field
Multiple default funds also present challenges for master trusts, particularly those at the smaller end of the market.
Fairbairn said: “There’s a lot of master trusts that want to get to £10bn AUM by 2030. Can they afford to have two different default funds? The answer is probably no.”
The Mansion House Accord saw 17 larger providers agree to allocate at least 10 per cent of their default funds to private markets. Fairbairn said this means smaller trusts have scant alternative but to follow suit.
“It is quite hard for those master trusts, because they are going to have to put private markets in, otherwise the government’s going to want to know why. This means they’re going to have to put the fees up, which makes it harder when they go out and compete for business against larger master trusts,” Fairbairn added.
While all eyes in the DC sector are on private markets, advisers say they need more clarity from providers on how implementation will work in practice, not just in terms of cost but also performance.
XPS’s Howley said: “It’s quite challenging to look across all the providers and say who is offering value in private markets strategies, because it is still early days. It will take time for clear frameworks to be in place.”
Overall, advisers remained positive about this fundamental shift in the DC market, but said this new approach
is likely to have far-reaching implications for the industry, and the way it prices products..
