The government is considering allowing trustees to ‘smooth’ performance charges over a longer time frame to help DC schemes invest in more illiquid assets, such as infrastructure.
Speaking at Corporate Adviser’s virtual Pension Summit, the Department of Work & Pensions head of DC and international private pensions policy, Emma Varley said this was one of the options under active consideration.
She said the government wants to encourage DC schemes to invest in a wider range of assets, and “does not want to put up obstacles that could limit trustees’ ability to invest in these areas.”
One of the barriers to date that has stopped even large DC schemes investing in illiquid assets has been the charge cap on the default schemes of DC pensions.
The DWP is currently reviewing responses to its summer consultation on this 0.75 per cent cap, and Varley says a response would be published “towards the end of the year”.
While the government is looking at potential barriers that stop schemes investing in less liquid assets, Varley says the government is also encouraging more market innovation in this area to attract DC investment.
Speaking at the event, Varley said the DWP was also looking to accelerate the pace of consolidation amongst the smallest DC schemes and expects forthcoming legislation will speed up this process.
She says while consolidation in the DC market had increased it remains at a slower pace in the smaller end of this market, of scheme with less than £100m in assets.
New legislation will require trustees of these schemes to demonstrate how they provide value for money for members, when compared to larger schemes.
This will cover a range of issues from investment returns and costs, to governance standards and the range of assets they invested in.
She described this a an “important mechanism” which will challenge trustees to address whether the scheme offers good value.
Varley also updated attendees on the work the government was doing to address the small pots issue. However she made clear that at present the government was looking for potential solutions that did not involve primary legislation.
Varley said current projections suggest that without action there would be £27m small pension pots within the AE system by 2035, with an average size of just £1,000 – creating problems for both savers and providers.
She added that the pension dashboard will be one tool to help tackle this issue. The government has also set up a small pots working group which is due to publish its interim report this Autumn.
This will provide some “initial recommendations” and also set out a more detailed roadmap for the industry and delivery partners she said.