The UK government has been told that its proposals on incorporating performance fees within the charge cap calculation will make it “a little” easier for defined contribution (DC) schemes to invest in illiquid assets.
According to industry feedback on a consultation that closed on Friday, there are a host of other reasons why there aren’t more DC schemes investing in long-term illiquid assets.
“A focus by trustees on securing low charges in a competitive market; the prudent person principle, which requires schemes to take careful consideration of risk and reward; and operational barriers, such as the flexibility to move pots when requested and daily dealing, are likely to always result in only a very low proportion of scheme investment in [illiquid] assets,” said Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA).
The PLSA said the proposed measures to amend the charge cap so performance fees can be smoothed over several years would facilitate DC illiquids investment “a little”, but that it did not believe they would lead to a material change.
Similarly, the Association of Consulting Actuaries (ACA) said DC schemes faced additional barriers to investing in less liquid asset classes besides “the maths of fee numbers”.
The government’s consultation on smoothing performance fees contained the government’s response to a performance fee section of an earlier, broader consultation from September 2020 on ‘Improving outcomes for members of DC schemes’. It has previously said it would publish its response to the remainder of that consultation in June this year.
Tess Page, chair of the ACA’s DC committee, said the association looked forward to that publication “to allow consideration of all pieces of the puzzle in a holistic manner”.
When the Department for Work and Pensions (DWP) launched its consultation on incorporating performance fees within the charge cap last month, Nico Aspinall, CIO of B&CE, the provider of The People’s Pension, said the proposed measures were not likely to increase the flow of funds from DC master trusts “into expensive asset classes where managers commonly charged performance fees”.
“Larger workplace pension schemes usually charge well below the charge cap because that is what employers and savers demand,” he said. “Consequently, most have a lot of headroom before they risk breaching the cap.”
Darren Philp, director of policy at multi-employer DC provider Smart Pension, told IPE that allowing for smoothing of performance fees does remove a barrier, but would not “fundamentally change the landscape”.
“The charge cap has almost been too successful and it’s focussed the market totally on price,” he said. “Now what we need to do is get it back to a focus on value, because if you’re investing in anything other than a passive tracker it will cost more.”
Smart recently partnered with Natixis Investment Managers to develop a private credit strategy for its default strategy; the fund will also be accessible to other UK pension schemes.
The government consultation on performance fee smoothing also asked for views on the current position on look-through in relation to closed-ended investment structures. In the forward to the consultation, pensions minister Guy Opperman said the government had been told this reduced the attractiveness of such products amongst DC pension scheme trustees, and that he wanted to understand if this was a consensus view of the industry and what changes the government could consider to release investment in such products whilst maintaining the integrity of the charge cap.
The PLSA and the ACA both indicated that more clarity would be welcome, but that there are more significant barriers to the success of pooled illiquid investment vehicles.