The new chancellor Kwasi Kwarteng reformed the pension charge cap in his inaugural ‘mini’ Budget, to encourage pension schemes to invest in infrastructure assets and less liquid private markets.
Announcing plans to stimulate growth in the UK economy he said that it was important to identify new areas of capital that can help fund critical infrastructure projects in transport, communications and energy.
Under these reforms the performance fees, which are often a key part of these private market investments will not be included within the 0.75% charge cap that is levied on default DC funds in the AE and workplace pensions market.
He also said he wanted to encourage innovative new funds which would invest in UK science and technology.
Aegon pensions director Steven Cameron welcomed the decision. He says: “The Government is determined to unleash the investment ‘super power’ of workplace pensions and increase investments in longer term less liquid assets. Such investments can deliver higher returns but they can also have higher charges and some are subject to performance fees which can’t be known in advance.
“Faced with unpredictable performance fees, schemes have feared such investments could lead to charges breaching the 0.75% cap for automatic enrolment workplace pension default funds. The Government is relaxing the cap to accommodate performance fees, hoping this will lead to workplace pensions investing more of their billions of funds in illiquid investments including infrastructure and productive finance.
“A small increase in charges in return for a bigger increase in investment returns is of course a good thing and could boost members’ pension pots. However, fears of breaching the charge cap is not the only barrier discouraging pension schemes from investing in illiquids. One key point for those who do use the new relaxations is to make sure members understand the longer term potential investment benefits rather than simply being concerned over potentially higher charges.”
Phil Brown, director of policy at B&CE, which runs The People’s Pension master trust agreed that this change might not result in significant difference to investment strategies. He said: “Reforms to the charge cap does not alter the fact that trustees control how pension schemes invest. Exempting performance fees from the cap shifts responsibility for getting value from investments back to trustees.
“Furthermore, the commercial reality is that employers buying pensions for their staff expect workplace pension charges to be well below the charge cap. That is a much bigger barrier to schemes increasing charges to pay for more sophisticated investment approaches than any piece of regulation.”
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