Chancellor Rishi Sunak has announced a consultation on reforming the charge cap on DC workplace pensions in today’s Budget.
This charge cap is currently set at 0.75 per cent. In his budget speech he said reform of this charge cap would be part of a series of measures designed to unlock institutional capital and encourage greater investment in infrastructure and green projects, helping to make the UK a “science and technology superpower”.
Consultation is expected before the end of this year.
However some pensions experts pointed out that many DC workplace pension currently charge far less than this cap, and competitive pressures may still restrict investments into these higher charging, but potentially higher returns asset classes.
LCP partner and former pension minister Steve Webb says: “Relaxing pension charge cap to encourage illiquid investments is really missing the point — most schemes are well below the charge cap and barriers to investment are not primarily about charges.”
This was a point made by the Department of Work and Pensions at the recent Corporate Adviser Summit.
However the decision to consult on this issue was welcomed by the industry.
Aegon pensions director Steven Cameron says: “This announcement is a further signal of how determined the Government is to break down barriers stopping workplace pensions investing more of their billions of funds in illiquid investments including infrastructure and productive finance. It’s great that pensions are now recognised across Government as an investment ‘super power’ which can support economic recovery. A wider range of investments could also improve returns to workplace pension members.
“Illiquid investments can have higher charges and some are subject to performance fees which can’t be known in advance and could lead to investment charges exceeding the maximum charge for workplace pension default funds of 0.75 per cent. The Government wants to remove this barrier. A small increase in charges in return for a bigger increase in investment returns is of course a good thing.
“But this is not the only barrier discouraging pension schemes to invest in illiquids. And with many having charges well below the 0.75 per cent cap, could be a red herring. An important challenge when implementing these changes will be to avoid raising concerns amongst workplace pensions members that they may be subject to higher charges. Raising such concerns to allow different investment strategies would be the tail wagging the dog.”
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey says: “We welcome the consultation on reform of the DC charge cap announced in today’s Budget.
“While introduced to safeguard value for scheme members we know that cost is only one determinant of value. There will be appetite to invest in more illiquid assets, especially if it aligns with people’s values of a greener future and this would prove difficult with the charge cap in its current form. We await the full detail, but it will be interesting to see if this may also read across to charges on drawdown investment pathways.”