The UK’s Financial Conduct Authority (FCA) has proposed excluding certain performance-linked fees from the charge cap for default funds in contract-based workplace pensions, in a move aimed at removing barriers to private markets investment.
The proposals come amid the government’s push to consolidate workplace pension schemes and strengthen the focus on value for money, with larger pension funds expected to benefit from economies of scale and greater investment flexibility.
Performance-linked fees are common in private markets, including private equity, venture capital and private credit. Pension providers have committed to increasing their allocations to private markets under the Mansion House Compact, which targets a 5% allocation to unlisted equities in default funds, and the Mansion House Accord, which targets a 10% allocation to private markets by 2030, including 5% to UK assets.
The FCA said the proposed exemption would give providers greater flexibility to access a broader range of investments where these could improve long-term returns and value for savers.
However, the regulator stressed that greater investment flexibility should not automatically translate into higher charges, with providers expected to assess potential returns, risks and costs when making investment decisions.
The proposals also include safeguards covering fee transparency, fair allocation of charges between members and scrutiny of private asset valuations. Providers and independent governance committees would need access to sufficient information to assess whether performance-linked fees deliver value for money.
Therese Chambers, executive director of enforcement and market integrity at the FCA, said: “People’s pension savings should work hard for them. We want providers to have greater choice over how they invest for the long term where this can deliver better outcomes for savers.
“But greater flexibility is not a licence to charge more. Any higher charges must be justified by additional value, with firms carefully weighing returns, risks and costs when deciding what is in savers’ best interests.”
Any higher charges must be justified by additional value, with firms carefully weighing returns
The proposals would bring FCA rules more closely in line with those governing trust-based pension schemes, where certain performance-linked fees have been excluded from the charge cap since 2023.
The consultation closes on 14 January 2027, with the FCA expecting to finalise the rules in summer 2027.
Industry welcomes flexibility but warns on member outcomes
Kelly Parsons, head of DC proposition at Broadstone, said excluding certain performance-linked fees from the charge cap could broaden investment opportunities and give providers greater scope to generate stronger long-term returns for members.
She said: “Private market investments can offer valuable diversification and access to growth opportunities, while potentially unlocking more pension capital for investment into UK businesses and infrastructure. However, providers must ensure that any increase in fees is justified by better outcomes for members.”
Parsons noted that the proposals coincided with the government’s increasing focus on value for money and its drive to accelerate workplace pension consolidation to achieve economies of scale.
“Bigger does not automatically mean better, and the drive towards larger schemes and greater investment in private assets must translate into tangible benefits for savers,” she noted.
Parsons added that robust governance, transparency and scrutiny of investment performance would be “essential”, while greater alignment between contract-based and trust-based pension rules would help establish a more consistent regulatory framework.
Jenny Holt, product director at Standard Life, said removing barriers associated with the charge cap could help pension providers meet their Mansion House commitments by making private markets more accessible.
She said: “Done well, this could give schemes greater scope to seek good long-term outcomes for savers, while also supporting the flow of long-term capital into UK businesses, including innovative, early-stage companies. The workplace pensions market is already extremely competitive, and while these changes could be helpful in opening up investment opportunities, providers are likely to act only where they have high conviction that it will lead to better customer outcomes.”
Research by Standard Life and WPI Economics suggested that, with an appropriate regulatory framework, up to £200bn of DC workplace pension assets could be invested in UK private markets by 2035, potentially supporting as many as 14,000 UK small and medium-sized enterprises.
Holt stressed that consistency across the regulatory framework would “be important”.
She said: “The DWP has already taken steps in this area for trust-based schemes, and the FCA’s approach for contract-based schemes needs to work effectively alongside them. A consistent approach across the pensions system will help avoid unnecessary complexity and support the wider direction of travel towards fewer, larger schemes with greater scale to invest for the long term.”
