Sunak reignites investment charges debate with plans to encourage more workplace pension schemes into illiquid assets. Mona Dohle reports.
The government reviving its plans to let defined contribution (DC) pension schemes pay higher investment fees has been met with scepticism from industry leaders.
Chancellor of the Exchequer Rishi Sunak announced a further consultation on the issue during the Autumn Budget, which could let workplace pension schemes invest in illiquid assets. This is widely seen as a move to encourage more private capital into upgrading the UK’s infrastructure.
DC schemes are currently bound to a charge cap of 0.75% of funds under management to protect scheme members from disproportionate fees. But this new consultation will examine if the charge cap prevents workplace pension schemes from investing in alternative assets, such as venture capital funds and growth assets.
This is putting the Treasury against the Department for Work and Pensions (DWP). In January, the DWP shelved plans to change the charge cap, but Sunak pledged in October that the government would continue to consult on changes to the charge cap, in a bid to unlock much needed infrastructure investment.
The cap has been in the government’s spotlight for several years. By scrapping the limit, the government aims to encourage DC schemes to diversify their investment strategy and access less liquid asset classes, which could help fund their plans to not only jump start the economy but also make it more resilient to future stocks.
But Sunak’s pledge has been met with mixed responses. Nigel Peaple, director of Policy and Advocacy at the PLSA, warned that the current cap has been put in place to protect savers from higher fees in default funds. At an average of 0.48%, DC scheme fees are already far below the cap, he said.
“Measures to amend the charge cap, particularly related to the smoothing of performance fees, might make it a little easier for some schemes to invest in illiquid assets. However, we do not believe that alterations will necessarily lead to a material change in investment in illiquid assets,” Peaple said.
Pension schemes have benefited from the gradual reduction of fees over the past decade, largely as a result of the rise of pas- sively managed funds. Average fees for actively managed funds have fallen by 13% over the past year, according to Morningstar.
Nest, as the largest provider of DC pensions, opted not to respond the announcement but stressed that it had already launched infrastructure and green investment funds which comply with the current cost limits.
“In terms of our members, who include some of the lowest paid in society, delivering a high-quality investment solution includes accessing illiquid assets at low/reasonable cost. We have already demonstrated that this can be achieved in private credit, property and infrastructure,” a spokesperson for Nest said.
Phil Brown, director of policy at B&CE, provider of The People’s Pension, also believes that lifting the cap would not necessarily affect investment policy. “We do not see the cap as having a significant impact either way on willingness to invest.
“This is because most schemes have quite a lot of headroom before they hit the charge cap, mainly because the market is so competitive on price in key market segments and also because the market sets an effective completive upper level for charges.
“More generally, we see the work of the productive nance working group as offering a reasonable roadmap for investment in unlisted assets. It makes sensible points around scale, cost and liquidity that schemes and the wider investment industry take on board.
“There has to be give and take here, though. Schemes are not willing just to accept the investment industry’s current pricing structure.
“If government wants schemes to invest more in infrastructure, there needs to be an understanding of what a reasonable cost, risk and return balance is,” Brown added.
Consumer advocates have gone one step further by stating that scrapping the charge cap could lead to rising costs for pension scheme members. Mick McAteer, co-director at the Financial Inclusion Centre, pointed out that scrapping the charge cap has been lobbied for by the Productive Finance Group, an industry-led Bank of England body which campaigns for increased investments in illiquid assets. He criticised the absence of public interest representatives in the group, which includes asset managers and institutional investors.
Peaple stressed that while institutional investment could play a role in closing the infrastructure funding gap, fiduciary duty should come first. “The pensions industry is open to investing in illiquid assets, such as infrastructure, provided they match the needs of pension scheme members and have the right investment characteristics.”