U.K. chancellor tackles charge caps for illiquid investments in emergency 'mini budget'

The U.K.'s Chancellor of the Exchequer unveiled a "mini budget" Friday aimed at making it easier for defined contribution plans to access illiquid asset classes, and other measures to stimulate economic growth, including tax cuts.

Delivering the emergency budget to the House of Commons, Kwasi Kwarteng said he would "accelerate" reforms to remove performance fees from the charge cap applied to defined contribution plans, as a way of spurring investment in science and technology businesses in the U.K.

The charge cap currently prevents defined contribution plans from applying annual charges of more than 0.75% on a participant's account.

"We will accelerate reforms to the pension charge cap, so that it will no longer apply to well-designed performance fees," Mr. Kwarteng said in his presentation. "This will unlock pension fund investments into U.K. assets and into innovative, high-growth businesses." He also promised that the U.K. would provide up to £500 million ($570 million) to support investment in innovative businesses through a new Long-Term Investment for Technology & Science competition.

Removing the charge cap sounds good in principle, but there are "a number of hurdles to overcome before DC savers can benefit from investing at scale in private markets," said Chris Inman, partner and head of DC investment advisory at Aon, in a separate statement.

"Many life-insured and investment platforms will have to make significant developments to their liquidity management policies/systems and governance teams so that they are able to launch these funds," and fund managers will need to see sufficient scale to commit resources to launch funds that provide access to alternative assets, he said. And with trustees focused on costs, they may be hesitant to jump in, "especially as the fees they publish may come under scrutiny," Mr. Inman said.

The size of fees for more sophisticated investments "is a much bigger barrier" than regulation, said Phil Brown, director of policy for B&CE, the provider of The People's Pension. "The commercial reality is that employers buying pensions for their staff expect workplace pension charges to be well below the charge cap," Mr. Brown said in his own statement.

Stephen Budge, partner at consultant Lane Clark & Peacock, said that while government support for giving defined contribution participants more access to illiquid asset classes is critical, "we aren't convinced these steps will necessarily open the flood gates on their own."

For trustees, the priority is identifying appropriate investment opportunities, not supporting specific sectors of the economy, said Tim Middleton, director of policy and external affairs at the Pensions Management Institute, a membership organization for pension professionals, in an emailed statement. The chancellor's proposal "is a pragmatic step" but if it succeeds, "it will be because science and technology would represent an appropriate investment and a legitimate alternative to existing assets," Mr. Middleton said.

It also unclear when the changes might be made and how "well-designed performance fees" will be defined, said Matthew Swynnerton, pensions partner with law firm DLA Piper. "Trustees have an overriding duty to act in their members' best interests and cost is only one factor that they will take into account when determining value," he said.

Mr. Kwarteng also said that the government later this year will "bring forward an ambitious deregulatory package to unleash the potential of the U.K. financial services sector," by replacing Solvency II regulations, the EU directive setting regulatory requirements for insurance firms, including pension buy-in and buyout providers.