The industry has criticised proposals made by Phoenix Group – the owner of Standard Life – to increase the charge cap on workplace pensions for younger savers.
Leading trustees have described the proposals as “unnecessary” and an “odd move”, citing evidence of master trusts successfully including illiquid in DC defaults at the current charge cap and below.
Phoenix has called on the government to increase the cap for younger savers — though they stepped back from recommending a specific level, saying it is this age cohort that has the capacity to take on more investment risk.
But some industry experts have called instead for asset managers to change their pricing model to align with legislation, rather than adjusting current rules to fit the industry’s pricing model. However supporters of these proposals have said there is a low-cost obsession that is demotivating advancements in the industry.
A spokesperson for Phoenix says: “We continue to encourage discussion amongst industry and government about the best way to generate the most attractive long term returns for workplace savers, that continue to offer value for money through a broader range of investment options. Younger savers have a greater capacity to take on higher risk and may be able to achieve better returns that outstrip a higher charge if they are given access to higher-risk asset classes.”
The government has been collaborating with industry and regulators to remove impediments to long-term illiquid investments within pension schemes. The DWP proposed amendments to the 0.75 per cent workplace pensions charge cap in November, which would allow performance fees for illiquid assets, and followed the announcement of reforms in October.
The charge cap reform is part of a series of measures aimed at unlocking institutional capital and encouraging greater investment in infrastructure and green projects, to make the UK a “science and technology superpower,” according to the government.
Capital Cranfield trustee Andrew Warwick-Thompson says: “It’s quite unnecessary to increase the cap. Both Cushon Master Trust and NEST, amongst others, have demonstrated that you can include illiquids in a DC default and keep it within the current charge cap. Calls to increase the cap is asking for the tail to wag the dog. It is for the asset management industry to change its pricing model to meet the legislative requirements, not the other way around. Pension schemes are here to provide a good retirement outcome for their members, not to buy Lamborghinis for asset managers.”
Canada Life technical director Andrew Tully says: “Encouraging investment in illiquid assets is a clear priority of the Government as it seeks to fulfil its ‘Levelling Up’ agenda. This may be more appropriate for younger savers than those closer to retirement, but we need to remember higher returns are not in any way guaranteed, so these options would need to be carefully communicated. However, increasing the charge cap for younger savers feels like an odd move as most workplace schemes already operate well below the cap at between 0.4 per cent and 0.5 per cent. And having differing charge caps, or a higher charge cap would risk confusing those who we want to encourage to start saving.”
Scottish Widows head of pension investments and responsible investments Maria Nazarova-Doyle says: “The industry needs to get to a place where large schemes, irrespective of whether they are trust or contract based, have the opportunity to invest in strategies that can deliver strong retirement outcomes for members. Higher fees could be used to help deliver better investment strategies, including illiquids, which could lead to higher after-fee returns over the very long term that young savers have before retirement. This could give them a better overall outcome and bridge their retirement savings gap, even though they may pay more to achieve it, with a focus on net of fees outcomes. Innovation in the sector can unlock more long term investment opportunities for workplace members, but we need to balance any changes against making pensions more complex or diluting an important protection that the charge cap provides.
Not everyone disagrees with Phoenix’s recommendation, highlighting the fact that the duration of a young saver’s investment allows them to try out riskier, higher-returning options which should be explored.
Franklin Templton head of UK retirement Lee Hollingworth says: “Of course Phoenix aren’t arguing that younger savers simply pay higher charges. For younger pension investors, given the likely duration of their investment, e.g. 40 years or more, it makes sense to explore options that take more risk with the potential to deliver higher returns. Given low saving rates among this population, anything that can generate better outcomes should be considered. We need to get over this obsession with ultra-low cost. It’s stifling innovation.”
