DC pension charge cap changes 'may prohibit' access to private markets and illiquids

The pensions industry has issued a mixed response to the Department for Work and Pensions’ (DWP) proposals for changes to the defined contribution (DC) charge cap, raising concerns that they could prohibit access to value-enhancing markets.

The consultation was launched in March and outlined proposed measures to allow occupational DC schemes to smooth performance fees within the charge cap over a longer period, this being part of an effort to encourage investment into a more diverse range of assets.

Hymans Robertson head of DC investments, William Chan, welcomed the consultation “as our main priority has always been the delivery of good long-term outcomes for members”, but added that the firm was concerned that the measures might “prohibit” access to private markets and illiquid assets.

He continued: “Ultimately, our concern remains that members will not benefit from the potential investment opportunities that exist to improve their long-term outcomes unless we can shift the emphasis away from the absolute level of charges, and avoid unnecessarily complex frameworks for accessing private markets.

“We are urging the DWP to engage leaders in the DC industry to develop a different set of regulations that supports, not hinders, investment innovation.”

Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy, Nigel Peaple, similarly welcomed the DWP’s “intent to make it easier for DC schemes to invest in a wider range of assets and illiquid investments”.

He added: “We support the charge cap at its current level, and as many schemes are interested in investing to some degree in illiquid assets, we also support the DWP’s proposal to amend the charge cap calculation, so that performance fees can be smoothed over several years.”

However, he also stated that he did not think that “the alterations will lead to a material change in the volume of investment in illiquids”, stating that further investment would be inhibited by trustees’ focus on “securing low charges in a competitive market”, as well as factors such as operational barriers.

He concluded: “Although it is clear that there are many challenges still to resolve, the PLSA supports measures that enable savers in workplace pensions to benefit from the risk/return profile that illiquid assets can deliver.

“As part of the work in the Taskforce on Productive Finance, the PLSA is helping look at structural and perceived barriers to DC schemes investing in illiquid assets, such as trustee skills and training.”

Association of Consulting Actuaries DC committee chair, Tess Page, said barriers to DC schemes incorporating less liquid assets in their investment strategies went beyond “the maths of fee numbers”.

She noted that other hurdles included platform requirements for daily pricing and liquidity, the multiple parties involved in reporting of costs at total fund level, risks associated with fund gating and member communications and “education on the risks and opportunities associated with these investments”.

Page continued: “There will always be demand for investments capable of offering attractive risk-adjusted long-term returns net of costs and charges. However, these must be delivered through investment vehicles that are straightforward to implement and monitor, with fair and transparent charging structures.

“The consultation is one step on the road, and we look forward to the response to the remainder of the September 2020 consultation “Improving outcomes for members of DC schemes” to allow consideration of all pieces of the puzzle in a holistic manner.”

This previous consultation concerned DC scheme consolidation, calling for trustees of schemes with assets of less than £100m to assess and report on how their scheme presents value for members, taking into account costs and charges, investment returns and various elements of governance and administration.

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