Industry cautious as government presses ahead with DC investment reform


30 Mar 2022

The UK government has launched a consultation in the hope of driving greater defined contribution (DC) investment into illiquid assets, but proposals to ease the charge cap have been met with criticism.

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The UK government has launched a consultation in the hope of driving greater defined contribution (DC) investment into illiquid assets, but proposals to ease the charge cap have been met with criticism.

The Department for Work and Pensions has launched a consultation at the end of March aimed at encouraging defined contribution pension funds to increase their investments in private markets such as infrastructure and private equity.

The reform proposals are part of the government’s attempt to attract more private cash to fund the transition to a carbon-neutral economy. Rishi Sunak, the chancellor, announced at the end of last year that institutional investors such as pension funds would play a key role in funding the transition.

The majority of DC scheme default funds are invested in developed market equities. As of 2020, some 70% of the average growth-oriented default fund was invested in equities, a mere 1% in infrastructure and 0.3% in private equity, according to the Pensions Policy Institute (PPI).

“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,” pension minister Guy Opperman said.

Disclose and explain

There are two key proposals in the release. One is that DC schemes managing more than £100m in assets should “disclose and explain” their policies on illiquid assets. The other is a commitment to assess changes to the charge cap, an initiative which has been met with criticism from the industry.

Changing the disclosure rules on illiquid assets would involve trustees disclosing in their Statement of Investment Principles whether they are invested in illiquid assets, which members are affected by the allocation and what their plans for future allocations to the asset class are.

The potential changes to improve disclosure standards were broadly welcomed by the industry. Maria Nazarova-Doyle, head of pension investments at Scottish Widows, described this as “a step forward”.

“We have seen this approach work well in facilitating a major shift to ESG investments in UK pensions and we are encouraged by this experience,” she added. “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.”

Joe Dabrowski, the PLSA’s deputy director of policy, responded with caution. “We are also concerned by the proposal to require schemes to invest a certain percentage of their assets in illiquid assets or explain why they are not doing so. This may pressure trustees into breaching their fiduciary duty to only invest in the interests of their members.”

Charge cap – mixed responses

Industry responses to easing the charge cap, which is currently set at 0.75%, were mixed at best. A total of 54 organisations, including trustee firms, DC schemes, law firms and asset managers, have responded to the proposals.

The PLSA was among the critics. “We do not support changing the charge cap to exclude performance fees. The cap provides an important protection for millions of automatic enrolment 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,” Dabrowski said.

The Trades Union Congress (TUC) warned that the move could put members at risk of having their ports eroded by higher fees whilst also being unlikely to lead to increased allocations in illiquid assets.

Age UK, a charity, said that change would have to come from the asset management industry, which should start catering to the growing DC market. “Access to the DC marketplace would be lucrative, yet there is seemingly little appetite for change from within the investment industry,” it said in a statement. “They continue to hold their ground and demand that the pensions industry pays the fees on their terms.”

This is also a problem highlighted by the PPI’s Daniela Silcock, who said that asset managers promoting illiquid assets should make their pricing structures compatible with DC fund structures.

Sottish Widow’s Nazarova-Doyle also criticised proposals to lift the cap. “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,” she said.  

The government acknowledged the criticism by stating that it had “taken on board the mixed responses” but that it would continue with the reforms whilst focusing on improved disclosure standards of performance fees.

The consultation launched today is open for further contributions until 11 May.


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