The UK government has confirmed it is to review the charge cap for defined contribution (DC) schemes with a view to boosting investment in domestic infrastructure.

Since the advent of auto-enrolment in the UK, DC schemes’ charges have been limited to 75 basis points, including all investment and administration charges.

The government has been exploring ways to encourage more schemes to invest in domestic infrastructure and other illiquid asset classes such as venture capital. Such investments usually come with a higher charge or fees linked to performance.

In his Budget speech today, UK chancellor Rishi Sunak said he wanted to focus on “unlocking institutional investment while protecting savers”.

A consultation is expected by the end of this year. The Department for Work and Pensions has undertaken several consultations regarding DC charges in the wake of auto-enrolment, but has so far made no changes.

However, consultancy group LCP said the chancellor had “missed the point” on charges. Most pension schemes’ concerns regarding illiquid asset classes did not relate directly to the charge cap, according to LCP’s head of DC Laura Myers.

“While the impulse comes from the right place, a plan to scrap the charge cap misses the point,” she argued. “There are a whole host of other concerns leading to industry reticence to invest in these assets, not least around issues regarding fairness for members and the opaque nature of illiquid assets.

“There is also the reality that many DC schemes invest via insurers who don’t accept many illiquid assets, so this won’t be changed by the magic bullet of charge cap changes. It’s a missed opportunity to address perceived barriers and some industry nervousness.”

LCP said clients were concerned about a lack of transparency in private markets, as well as access to guidance from regulators on allocating to complex investment strategies. The consultancy also emphasised the need for a focus on “value rather than cost”.

“We do not believe that alterations will necessarily lead to a material change in investment in illiquid assets”

PLSA director of policy and advocacy Nigel Peaple

The Pensions and Lifetime Savings Association also indicated that the charge cap was not the main issue for DC schemes. Director of policy and advocacy Nigel Peaple pointed out that, on average, schemes were well below the charge cap at an average cost of 48 basis points, according to the association’s data.

“We do not believe that alterations will necessarily lead to a material change in investment in illiquid assets,” he added. “The pensions industry is very open to investing in illiquid assets, such as infrastructure, provided they match the needs of pension scheme members and have the right investment characteristics, but this is a complex area, and we do not think the current charge cap is blocking such investments.”

Callum Stewart, head of DC investment at Hymans Robertson, said allowing access to investments that can demonstrate a clear positive impact, such as various types of infrastructure, could boost engagement among DC savers.

“Now is the time to explore this exciting development for those with the governance capacity to do so,” he said. “Although costs and charges are likely to be higher than most existing DC funds, we believe in this instance it’s possible to pay more and get more for DC savers.”

The announcement comes in the same week that the UK’s finance watchdog, the Financial Conduct Authority, gave the green light for a proposed new fund structure for illiquid assets.

The “long-term asset fund”, or LTAF, is designed to give pension schemes and other investors easier access to asset classes such as property and infrastructure with less of a risk of liquidity problems.

Sunak tweaks tax regime to address ‘net pay anomaly’

The chancellor today also announced a review of how pensions are taxed in the UK, aimed at addressing the so-called “net pay anomaly”.

In today’s Budget documents, the chancellor said the Treasury would explore how the rules can be amended so low earners do not miss out on the tax relief on their pension savings to which they are entitled.

Under the plan published today, the government aims to have resolved the issue for all affected savers by 2024 by making top-up payments to affected individuals.

Adrian Boulding, director of policy at NOW: Pensions – which has long campaigned for the government to address the issue – said low-income earners could be missing out on up to £111m (€131.5m) of government tax relief every year.

The issue affects workers whose pension contributions are taken from pay packets before tax is applied. Specifically, it affects those that earn more than £10,000 per year – the auto-enrolment minimum earnings threshold – but less than the £12,500 threshold at which point income tax becomes chargeable.

Mike Ambery, partner at Hymans Robertson, added: “It will be very welcome news for just over a million people saving into pensions. It is just a shame that these savers will have to wait for three years for the changes to actually come into force and to be finally able to benefit.”

Elsewhere, the chancellor also announced a freeze of the lifetime allowance – the maximum amount an individual can save into their pension over their lifetime.

Paul Barham, partner at Mazars, warned that “millions more people could be caught out” by the change to a tax that was originally aimed a small number of top earners. Previous changes have led to tax issues for doctors in the UK’s NHS pension scheme.

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