Charge cap reform: DWP to ‘provide a form of member protection’
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The Department for Work and Pensions is consulting on draft regulations and statutory guidance allowing defined contribution schemes to exclude performance fees from the charge cap from April next year but said it will include “a form of member protection”. Ministers also plan to press ahead with making trustees state their policy on illiquid investments.
The latest charge cap consultation published on Thursday follows another one from March this year on facilitating investment in illiquid assets, which sought views about reforming the 0.75% charge cap, new “disclose and explain” proposals for investing in illiquids, and employer-related investments.
Chancellor Kwasi Kwarteng said in his Mini-Budget speech on 23 September that plans to exclude performance fees from the charge cap would be accelerated, in the hope this would lead to more investment in productive UK assets.
Legislation by spring
Chloe Smith, the new work and pensions secretary, and de-facto pensions minister Alex Burghart said: “The direction is set, and we intend to legislate by spring 2023.”
They add: “We have listened to industry and refined our policy in light of the feedback we received.” However, the role which illiquid assets could play in improving pension outcomes for members should not be overlooked, they argue.
The draft regulations include allowing trustees to exempt performance-based fees from their charge cap calculations where they believe this would be in members’ best interests, without prescribing particular fee structures.
"Whilst we realise performance fees and their relation to the charge cap [are] not the sole challenge that DC and CMP schemes may face when looking to invest in certain illiquid asset classes, it does remove a potential barrier,” the ministers state.
Ministers seek to allay consumer protection concerns
Responses to the earlier consultation were mixed – while financial firms and a few master trusts welcomed the prospect of excluding performance fees from the cap, others said the change alone would not alter schemes’ approach to illiquid investments. Trade unions, consumer bodies and charities like Age UK strongly opposed the proposal, believing there was a lack of supporting evidence for the reforms and that the charge cap has been effective in protecting members.
The DWP has now said that to provide a form of member protection, the definition includes a provision that “trustees or managers of schemes must agree with the fund manager methods to mitigate the risk that the amount of the fee is increased as a result of short-term fluctuations in performance or valuations of the investment”, such as a clawback mechanism. Concerns were raised in the previous consultation that in some periods scheme members could receive outperformance but not be reimbursed for poor performance.
The DWP is also consulting on making schemes disclose their approach to illiquid assets and is now proposing the main asset classes for which the allocation would be required to be disclosed. It will include a look-through for multi-asset vehicles so these can be included.
The consultation ends on 7 November.
