The Department of Work and Pension is consulting on proposals designed to encourage DC pension schemes to invest in a wider range of assets.
Under these proposals trustees of larger occupational DC schemes would have to consider, and document, their policy towards investing in a range of more illiquid assets – including start-up companies, housing and green energy.
The DWP is also proposing that smaller schemes – with fewer than 1,000 members, or £10m in assets – should be required to formally consider if members would benefit from a merger with a larger scheme or master trust.
The DWP is proposing that this process should be followed every three years.
If these proposals are accepted this is likely to encourage further consolidation within the DC sector and boost the attraction of master trusts, by highlighting the benefits of scale.
This consultation document also sets out new proposals for testing if funds which charge performance fees are within the 0.75 per cent charge cap for automatic enrolment default funds.
Aegon says that if these proposals are accepted they could have a “sweeping impact on pension scheme members and where they are invested”.
Announcing these changes Pensions Minister Guy Opperman says: “I am not going to be telling pension schemes how to invest. I believe that we are opening doors.
“We can do more to attract new investment in important sectors of the economy. At the same time, this approach will give savers more pride in their pensions while delivering good returns.”
Aegon’s pension director Steven Cameron adds: “It’s official – when it comes to defined contribution pensions, the Government clearly believes big is beautiful. This will be a further boost to master trusts which are already dominating the DC pensions market.”
He adds: “The DWP highlights that the largest schemes can deliver better member outcomes through better governance, lower charges and the ability to invest in a broader range of assets, including less liquid investments.
“The Government believes encouraging DC schemes to make greater investment in illiquid assets such as infrastructure, innovation and new technologies will be good for the UK economy, boosting productivity and growth.
“Trustees of larger schemes will need to publish what percentage of scheme assets are invested in illiquid assets. But whatever the Government thinks, trustees must continue to make investment decisions based on what they and their investment advisers believe is in the best interest of the scheme members and beneficiaries.”
He points out that one barrier to DC schemes investing in illiquid assets is that they often charge performance fees, making it difficult to be sure overall charges are within the auto enrolment charge cap of 0.75 per cent.
Cameron adds: “It shows how serious the DWP is to encourage illiquid investments that they are setting out a new means of checking charge cap compliance. Interestingly, it looks like NEST, the Government subsidised scheme, will be barred from investing in investments with performance fees because it already has a more complex charging structure.”