The UK’s Department for Work and Pensions (DWP) has this week made a series of regulatory recommendations in response to two consultations that address performance fees, which it plans to put in place in October 2021.

The draft regulation would help facilitate occupational defined contribution (DC) schemes used for automatic enrolment investing in illiquid investments like private equity and venture capital.

A September 2020 consultation drafted regulations and statutory guidance to deliver better value for money for members of DC schemes, while a March 2021 consultation drafted regulations on performance fee smoothing over a five-year period and called for evidence on the issue of look-through. Both consultations are now closed.

The motivation behind this proposal, the DWP said, is to remove an identified barrier to investing in illiquid asset classes that generate performance fees, allowing schemes to accommodate the ‘ebb and flow’ sometimes associated with the performance of these assets and still remain within the charge cap.

In a statement, Guy Opperman, minister for pensions and financial inclusion, said: “We will move forward with new regulations which will come into force in October 2021. These measures will challenge some 1,800 smaller DC schemes to demonstrate that they continue to offer value for members and that that value is comparable to larger schemes.”

Joe Dabrowski, deputy director, policy, at the Pensions and Lifetime Savings Association (PLSA), said: “We support the government’s intent to facilitate DC schemes’ investment in the widest range of assets including, illiquid assets, private markets and other alternative investments, and maintenance of the charge cap.

“We therefore believe proposed calculation adjustments for performance fees and additional guidance on costs excluded from the charge cap while holding physical assets will provide clarity for schemes and aid those schemes which wish to add illiquid asset investment into their portfolio but have felt inhibited by current rules.”

He noted, however, that many other, structural factors are at play, including the cost and transparency of illiquid investments and the competitive and consolidating nature of the DC market.

“These proposals will only have a minor impact on asset allocation and there is unlikely to be a wholesale switch into illiquid investments,” he added.

XPS Pensions group agreed, stating that “the regulations may provide greater confidence to invest in illiquids, but this alone is unlikely to drive a change in market perception”.

Many respondents to the DWP’s consultation, including fund managers, proposed alternative or additional relaxations of regulations that they felt would go further to eliminating barriers to trustees choosing illiquid investments to diversify their portfolio. This included complete or partial removal of performance fees from the charge cap.

Opperman said evidence would help the government understand the opportunities for schemes and whether there would be barriers to greater consolidation.

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