The UK government has today launched a consultation on improving outcomes for defined contribution (DC) pension schemes, which encourages investment in a more diverse range of long-term assets, including illiquid products such as venture capital and green infrastructure.
The consultation, which runs until 30 October 2020, is the government’s response to the February 2019 consultation Investment Innovation and Future Consolidation.
In addition to promoting investment portfolio diversification, it also consults further on changes to regulations and statutory guidance designed to improve DC pension scheme governance, and signal the UK’s commitment to transparent disclosure to scheme members.
Under diversification, the government is proposing amendments to the charge cap to accommodate performance fees in order to facilitate investment in illiquid investments, and “to put the exclusion of physical assets on a statutory footing”, it said.
“We also announce our intention to develop a further alternative option for schemes to use in calculating performance fees, to facilitate investment in less liquid assets such as venture capital,” it added.
Guy Opperman, minister for pensions and financial inclusion, said: “We want all pensions scheme members to benefit from efficient administration, first class investment governance, and access to diversified investment strategies.”
He added that it is important to “encourage scale and innovation by pension schemes, and help drive new investment in important sectors of the economy as we build back better”.
LCP welcomed the government’s relaxation of charge cap rules which should free up further interest and support for illiquid assets.
“It’s also interesting to see the greater clarity and support to hold physical assets outside of the charge cap restrictions, clearly highlighting the intent to allow infrastructure focused investments. The charge cap relaxations and clarities offered are going to help significantly with enhancing investment strategy design,” the consultancy added.
Additional steps to encourage the consolidation of smaller pension schemes into larger schemes are also included in the consultation.
“We believe consolidation is the most effective way to ensure that all savers are receiving the best value from well governed schemes that can achieve economies of scale,” the consultation paper noted, adding that consolidation will also deliver greater opportunities for members to access a more diverse range of investment products and investment strategies.
Of around 3,000 DC schemes on The Pensions Regulator’s (TPR) register, approximately 2,150 have 100 members or less. Of these, approximately 850 have between 12 and 100 members and 1,300 have less than 12 members.
Most smaller schemes are also paying higher charges than larger schemes, with average charges in smaller schemes nearly double that of the largest schemes. Members of some of these smaller schemes are therefore likely to achieve better value in a larger scheme, the paper concluded.
“We propose that the new value for members assessment applies for schemes with less than £100m in total assets that have been operating for at least three years at the end of the previous scheme year from when their chair’s statement falls due,” it said.
LCP believes the £100m (€106m) mark for smaller schemes “seems a good level for requiring them to assess whether they offer value for money compared to the market”.
The full consultation can be found here.