The Department of Work and Pension (DWP) is pushing ahead with its plan to loosen the 0.75 per cent automatic enrolment charge cap by allowing performance fees, and is requiring schemes to explain their approach to illiquids.
Publishing its responses to its December 2021 charge cap consultation today, which gathered views on the removal of performance fees from April 2022, the DWP also outlined a proposal that would force pension schemes with assets of above £100m to explain their illiquid investment policy from April 2023.
But it has not pushed ahead with a rumoured drive to force consolidation amongst schemes with between £100m and £5bn.
Some responders claim that excluding performance fees from the charge cap will have no impact on trustees’ decisions on illiquid assets, while others warn of the dangers of exposing members’ pots to excessive costs.
But Hymans Robertson has backed the move, saying investing in illiquid assets will improve financial outcomes.
Scottish Widows says the DWP’s announcement is a ‘step forward’ towards illiquid investments.
The DWP says there will be further consultation before any efforts to remove performance fees from the auto-enrolment default fund charge cap are taken as well as a look at how the feedback obtained might be incorporated into future policy development.
Minister for Pensions Guy Opperman says: “I am passionate about ensuring pension schemes have the necessary information, and a broad range of options, to deliver the best possible outcomes for the record number of Brits now saving for retirement.
“Opening up greater illiquid asset options to DC scheme investment will help do just this and enable schemes – and savers – to benefit from more diversified portfolios, while also bolstering the role pension investments can play on our journey to a carbon-free economy.”
PLSA deputy director of policy Joe Dabrowski says: “We do not support changing the charge cap to exclude performance fees. The cap provides an important protection for millions of Automatic Enrolment (AE) savers. We have not seen enough evidence to suggest the change would improve outcomes for members. In our view, changes to the cap are also unlikely to fundamentally alter schemes’ ability to invest in illiquid assets or the volume of investments in the round.
“There are a number of important reasons for this: larger schemes are already incorporating private market illiquids into their default funds, and issues of scale mean the change will only impact a limited number of additional schemes; a focus on low charges in a competitive market; the prudent person principle which requires schemes to take careful consideration of risk and reward and operational barriers, such as the flexibility to move pots when requested; and daily dealing also play a part.
AJ Bell head of retirement policy Tom Selby says: “The government faces a predictable backlash from various corners of the pensions industry over controversial plans to water down the automatic enrolment charge cap. These concerns are entirely justified – any move to exempt performance-based fees from the charge cap risks leaving members’ exposed to higher costs.
“Of course, cost is just part of the value-for-money equation, and the key is whether these investments can justify the associated extra fees. Policymakers clearly firmly believe illiquid investments can deliver better overall returns for members than more mainstream asset classes. While there is some evidence to suggest this could be the case, there are no guarantees and many trustees will understandably be wary.
“Ultimately trustees have a fiduciary duty to invest members’’ hard-earned funds in a way that is most likely to deliver the biggest retirement pot possible. Just because the government wants pension schemes to help the UK ‘Build Back Better’’ doesn’t mean those schemes will play ball. Whether or not performance fees are eventually excluded from the charge cap, trustees will still need to satisfy themselves these investments are appropriate for largely disengaged members who end up in their auto-enrolment ‘default’ fund.
Aegon head of pensions Kate Smith says: “We’re pleased that the DWP has concluded that bigger is not always better for all members. We welcome the government’s decision not to go ahead with regulation forcing schemes with between £100m and £5bn assets to consolidate. We believe it’s far too early to do this. We need to see the impact of the current value for money regulations play out on smaller schemes and whether, if they fail the test, trustees decide to improve or wind-up. We therefore welcome the government’s decision not to proceed with regulation to accelerate the pace of scheme consolidation and to refocus on the regulators’ joint value for money framework.
“We believe the proposals to require trustees to disclose their stance on investing in illiquid asset classes will need further thought. We welcome the DWP seeking to avoid making this a costly exercise. The key issue is who will truly find the new disclosures helpful and if they actually will change trustee investment behaviour. Ultimately, a key issue is that members of DC schemes now expect daily pricing and the ability to switch funds, transfer between schemes or access their benefits flexibly from age 55. These remain the main barriers to greater investment in illiquids.”
Hymans Robertson head of DC investment Callum Stewart says: “It is good to see the DWPs continued commitment to facilitating investment in illiquid assets with the publication of its consultation today. Investing in illiquid assets provides strong opportunities to improve financial outcomes for DC savers as well as have an impact on the world around us. It is a golden opportunity to create benefits for DC savers, and engage them more positively in how their pension is invested, while at the same time having an impact on the world around them.
”We are keen to see the government and the industry focus not just the long-term financial considerations, but also the potential to have positive real world impacts from illiquid investments. So far, discussions around value have centred too heavily on financial aspects, particularly costs and charges. Indeed, this consultation does not make clear reference to the potential to have positive environmental or social impacts from illiquid investments. It’s time to update the way we think about value to ensure that this is compatible with future DC saver and their real world needs. ”
Julius Pursaill, strategic adviser to Cushon says: “Cushon is strongly supportive of the requirement for DC trustees to explain their policy on illiquids. We think it’s a proportionate mechanism to force trustees to consider whether or not they believe that investing in illiquids is in their members’ interests and why.
“In terms of the charging cap, we should be very cautious about tinkering with this – particularly as any loosening of it to encourage private markets allocation is unnecessary and potentially counterproductive.
“Over the past years the cap has driven prices down significantly, as a result of both consolidation and incentivising providers to innovate, and driven significant benefits for members. Cushon has also already shown – through our 15% allocation to private markets in our new default investment strategy – that the charge cap is not the issue that is limiting private market allocations.
“Action is therefore still needed. A far more significant issue than the charge cap is encouraging all stakeholders in the value chain to focus on value alongside price, rather than on price in isolation. Delivering a meaningful private markets allocation – and we believe at least 10% is needed to move risk adjusted returns to an extent that matches the additional governance burden – within a competitive investment TER is a challenge. While price continues to be the dominant driver of provider selection decisions, private markets will struggle for adoption.”
Scottish Widows head of pension investments and responsible investments Maria Nazarova-Doyle says: “Today has been a step forward in DC pension schemes’ journey towards illiquids investments. The new consultation on requiring pension funds over £100m in assets to disclose their policy relating to private market investments is a helpful development and will potentially help the industry edge closer to making this investment class mainstream in DC. We have seen this approach work really well in facilitating a major shift to ESG investments in UK pensions and we are encouraged by this experience. The hope here is that pension funds would have to allocate some time to considering how such investments can improve member outcomes, which hopefully will lead to their incorporation into DC investment strategies, helping to align members’ long-term investment horizon with long-term investment opportunities.
However, the announcement on relaxing the charge cap to incorporate performance fees is unlikely to have significant impact as there’s little interest from UK pension funds in paying these fees, nor is there a requirement from the asset management industry to charge these for access to private markets. At Scottish Widows we don’t see how these fees can improve member outcomes and consider them unproductive and also unnecessary, given that the main private market mangers operating in the UK are happy to work on the basis of flat fees and without performance fees.
This is not a watershed moment but definitely a step in the right direction to help develop UK DC pension schemes into sophisticated long-term investors.”