Industry organisations have warned that the government's plan for further regulatory changes to the charge cap for defined contribution (DC) pension schemes may “miss the point” in encouraging greater investment in illiquid assets.

The government confirmed in the Budget that it would consult on further changes to the charge cap in an effort to unlock institutional investment for UK businesses and allow pension savers to benefit from higher returns.

However, LCP head of DC, Laura Myers, warned that whilst the impulse comes from the right place, a plan to scrap the charge cap “misses the point”.

“There are a whole host of other concerns leading to industry reticence to invest in these assets, not least around issues regarding fairness for members and the opaque nature of illiquid assets,” she explained.

“There is also the reality that many DC schemes invest via insurers who don't accept many illiquid assets so this won't be changed by the magic bullet of charge cap changes. It's a missed opportunity to address perceived barriers and some industry nervousness.”

Aegon pensions director, Steven Cameron, also said that whilst it is “great that pensions are now recognised across government as an investment ‘super power’”, higher charges are not the only barrier discouraging pension schemes from illiquid investments.

“And with many having charges well below the 0.75 per cent cap, could be a red herring,” he continued.

“An important challenge when implementing these changes will be to avoid raising concerns amongst workplace pensions members that they may be subject to higher charges. Raising such concerns to allow different investment strategies would be the tail wagging the dog.”

This was echoed by PwC global head of pensions, Raj Mody, who suggested that the increasing flexibility in charge caps will not by itself lead to a massive surge in investment in higher cost and higher growth projects.

He said: “For any change to work, the government would need the whole ecosystem of institutions, fund managers and savers to be behind it.

“Savers might be supportive if it means access to better returns on their savings, but would want to ensure that the risk and returns are worth the cost - which are still to be determined.

"It remains to be seen how far the government will allow fund managers to go in terms of passing on a share of their performance fees to members.”

Barnett Waddingham head of DC investment, Sonia Kataora, also argued that workplace pension scheme charges are generally working well under the existing cap, agreeing that whilst adjusting the cap assist with some investments, it “doesn’t tend to be the deciding factor for trustees when deciding whether a strategy creates good value for members”.

In addition to this, she noted that younger members are most likely be able to invest in infrastructure assets given their long investment horizons, whilst those closer to retirement will need greater liquidity.

“We need to ensure this doesn’t lead to an unfair charge hike for all members, or an intergenerational divide when it comes to fees and charges,” she warned.

“Neither of these are a palatable solution, especially with the Department for Work and Pensions pushing hard for best value and fair charging to solve the UK’s pensions crisis.”

Adding to this, The Investing and Saving Alliance head of retirement, Renny Biggins, suggested that a slight increase enabling the investment in green initiative and UK infrastructure with a potential uplift in returns may be appealing to consumers.

However, he agreed that this needs to be approached “carefully to ensure consumers remain protected”.

Despite the concerns, industry organisations have also highlighted potential benefits of the proposed change, with Hymans Robertson head of DC investment, Callum Stewart, suggesting that investment in illiquid could offer “a golden opportunity to improve engagement with members”.

He said: “Individual DC savers have been expressing to the industry that they want their money to have a positive impact on the world around us, and illiquid investments provide an effective means to achieve this.

“Some of the historic barriers to accessing illiquid investments are easing, and we have seen great examples already of DC schemes accessing these assets to improve outcomes for their members.

"Now is the time to explore this exciting development for those with the governance capacity to do so. Although costs and charges are likely to be higher than most existing DC funds, we believe in this instance it’s possible to pay more and get more for DC savers.”

Hargreaves Lansdown senior pensions and investment analyst, Helen Morrissey, also welcomed the consultation, suggesting that there will be appetite to invest in more illiquid assets, "especially if it aligns with people’s values of a greener future and this would prove difficult with the charge cap in its current form".

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