Defined contribution (DC) pension schemes are being encouraged to invest in a more diverse range of long-term assets, including illiquid products such as venture capital and green infrastructure, through proposals published by the DWP today.
A DWP consultation published today outlines draft regulations that provide an easement to the requirement to prorate performance fees when assessing compliance with the charge cap.
The new rules mean that where a scheme member is in the default arrangement for only part of a charges year, trustees will still have to calculate a prorated charge cap based on the length of time they have been a scheme member. But when assessing the charges that scheme members have paid against the prorated cap, trustees will exclude the performance fee element.
This change only applies to partial year membership. When considering a scheme member who is in the default arrangement for the whole of the charges year, the performance fee would be assessed against the charge cap.
This proposed easement will not apply to all performance fees; the draft regulations only allow trustees to exclude a performance fee from the calculation where it is accrued each time the value of the investments is calculated.
This prevents a situation where a scheme member joins an arrangement after an investment has increased in value and ends up paying a performance fee on the growth which occurred before they joined.
A performance fee which is accrued less frequently than the tradeable value of the investment is calculated would still be subject to the prorating requirement, says the DWP.
The consultation also includes further questions around how to create a multi-year rolling calculation of charges, to give DC trustees more confidence to invest in less liquid assets such as venture capital.
It also considers putting the exclusion of the costs of holding physical assets, such as real estate or infrastructure from the charge cap on a statutory footing.
The consultation is published alongside the Government’s response to a February 2019 consultation ‘Investment Innovation and Future Consolidation’, which sets out plans for improved transparency around charges and performance for single-employer DC trusts.
Minister for pensions and financial Inclusion Guy Opperman says: “We want all pensions scheme members to benefit from efficient administration, first class investment governance, and access to diversified investment strategies.
“The UK has a world-class occupational pension system. We want to encourage scale and innovation by pension schemes, and help drive new investment in important sectors of the economy as we build back better.
“The UK is committed to leading the way in the provision of green technology and infrastructure, and we want pension funds to be at the forefront of taking advantage of these long-term opportunities.”
LCP principal Stephen Budge says: “We welcome the Governments relaxation of charge cap rules to allow for such things as performance fees which should free up further interest and support for illiquid assets. It’s also interesting to see the greater clarity and support to hold physical assets outside of the charge cap restrictions, clearly highlighting the intent to allow infrastructure focused investments. The charge cap relaxations and clarities offered are going to help significantly with enhancing investment strategy design.”