The new chancellor Kwasi Kwarteng reformed the pension charge cap in his inaugural ‘mini’ Budget, to encourage pension schemes to invest in infrastructure assets and less liquid private markets.
Announcing plans to stimulate growth in the UK economy he said that it was important to identify new areas of capital that can help fund critical infrastructure projects in transport, communications and energy.
Under these reforms the performance fees, which are often a key part of these private market investments will not be included within the 0.75% charge cap that is levied on default DC funds in the AE and workplace pensions market.
He also said he wanted to encourage innovative new funds which would invest in UK science and technology.
Aegon pensions director Steven Cameron welcomed the decision. He says: “The Government is determined to unleash the investment ‘super power’ of workplace pensions and increase investments in longer term less liquid assets. Such investments can deliver higher returns but they can also have higher charges and some are subject to performance fees which can’t be known in advance.
“Faced with unpredictable performance fees, schemes have feared such investments could lead to charges breaching the 0.75% cap for automatic enrolment workplace pension default funds. The Government is relaxing the cap to accommodate performance fees, hoping this will lead to workplace pensions investing more of their billions of funds in illiquid investments including infrastructure and productive finance.
“A small increase in charges in return for a bigger increase in investment returns is of course a good thing and could boost members’ pension pots. However, fears of breaching the charge cap is not the only barrier discouraging pension schemes from investing in illiquids. One key point for those who do use the new relaxations is to make sure members understand the longer term potential investment benefits rather than simply being concerned over potentially higher charges.”
Phil Brown, director of policy at B&CE, which runs The People’s Pension master trust agreed that this change might not result in significant difference to investment strategies. He said: “Reforms to the charge cap does not alter the fact that trustees control how pension schemes invest. Exempting performance fees from the cap shifts responsibility for getting value from investments back to trustees.
“Furthermore, the commercial reality is that employers buying pensions for their staff expect workplace pension charges to be well below the charge cap. That is a much bigger barrier to schemes increasing charges to pay for more sophisticated investment approaches than any piece of regulation.”
Hymans Robertson head of DC investment Callum Stewart was also supportive of this move. “We welcome the government’s continued commitment to exploring how they can remove barriers to investing in illiquid assets. We believe some illiquid assets can improve member outcomes at retirement and as schemes become larger, the more traditional problems such as daily liquidity are likely to be less of a challenge. As with any investment, it will be critical to explore where these asset types can add most value for members through their pensions journey and not simply regard them as a panacea.”
He adds that the industry acknowledges that more investment in illiquid assets investment by DC schemes could make a big difference in society, given their potential to contribute to projects such as renewable energy. “If we can also use this as a way to engage members in their pension savings – because they can physically see the good their money is doing – we can also potentially encourage them to contribute more to their pension savings. This will add to an improvement in overall long term outcomes.
“However we remain concerned that at a time of further worry for many, comments around charge cap are merely covering up the worries of many. Within the industry, we are afraid that pensions savings will be the first thing to be cut for many, leading to an ever increasing number of pensioners and future pensioners heading into pensioner poverty.
“Tinkering around the edges won’t address these big issues. We would advocate a material overhaul of the auto-enrolment legislation, with much more done to encourage individuals to forward plan and invest in their pensions and enable them to do so when their position improves. We also need to move the dial on investment approaches, with more focus on embracing potentially significant opportunities to improve outcomes, rather than tinkering with the minutiae in the regulations. Without this, we are not going to address the concerns for many and support much better long term outcomes.”