U.K. defined contribution plans may soon be getting access to more expensive illiquid investment strategies as the government will consult on removing a fee cap on DC investments, said Rishi Sunak, chancellor of the exchequer, during a budget speech Wednesday.
Mr. Sunak said the consultation to end the 0.75% cap on annual management fees that DC plans pay is underway. There is no timetable for a decision. However, industry sources are doubting whether removal of the regulatory barrier will encourage more DC plans to invest in infrastructure and renewable energy.
Consultants commented that among other concerns are appropriate approaches to distributing proceeds from illiquid investments to all participants to ensure fair retirement outcomes as well as transparency of performance fees used by private markets managers.
"While the impulse comes from the right place, a plan to scrap the charge cap misses the point," said Laura Myers, partner and head of DC at consultant Lane Clark & Peacock, in an emailed comment. "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."
James Monk, head of DC investment at Aon, added in a separate email that the move could help improve diversification of DC plans in the future.
"However, it won't help employers and trusts make more effective decisions around which strategy is likely to provide its membership the best member outcome," Mr. Monk said.
Sonia Kataora, partner and head of DC investment at consultant Barnett Waddingham, said in an email that while adjusting the cap might assist with some investments, the cap doesn't tend to be the deciding factor for trustees when deciding whether a strategy creates good value for plan participants.
"We need to ensure (that removing the cap) doesn't lead to an unfair charge hike for all members, or an intergenerational divide when it comes to fees and charges," Ms. Kataora said.
Nigel Peaple, director of policy and advocacy at Pensions and Lifetime Savings Association, said the group supports the current charge-cap level, which protects savers against high fees in DC default funds.
Mr. Peaple noted that the PLSA wants the government to allow time to see the effects other recent changes for DC plans have had — such as allowing performance fees to be spread over years and new types of illiquid funds approved by the Financial Conduct Authority — before consulting on further amendments.
