U.K. proposes easing charge cap to stimulate DC private market investment

The U.K. effort to boost defined contribution plan investments in private markets advanced Thursday with a Department for Work and Pensions proposal to remove performance-based fees from the current charge cap.

Under the proposal, which is open for comment until Nov. 10, defined contribution plan trustees could exclude specified performance-based fees from the list of charges under a regulatory charge cap limit of 0.75%, if it would be in the best interests of participants.

With defined contribution assets expected to double by 2030, "it's right that trustees and managers now consider investing in a broader range of assets as part of a diversified portfolio," Chloe Smith, secretary of state for the Department for Work and Pensions, and Alex Burghart, parliamentary undersecretary for the Department for Work and Pensions, said in the proposal's foreword, calling it one of the government's "key priorities."

More investment in private markets, including startup companies, renewable projects and infrastructure "can offer potentially greater returns for pension savers building towards retirement and can have the added benefits of improving the U.K. economy and society," said the officials, who are also reviewing feedback received on a related proposal to require plans to state a policy on illiquid investment and to disclose asset allocations.

On the latter topic, "the direction is set" and legislation will be introduced by spring 2023, the ministers said in the foreword.

Easing the charge cap should not reduce plans' bargaining power when it comes to the appropriateness of the investments and the performance fees, the DWP proposal said. "We would expect fund managers to provide evidence to the trustees that investments in those types of investments are expected to benefit DC members, after fees and cost."

Jiri Krol, deputy CEO and global head of government affairs for the Alternative Investment Management Association, said in a separate statement that exempting performance fees from the charge cap can "make it easier for DC pension schemes to invest in these assets where it is in their members' best interests," and he welcomed a DWP decision "to include multiple safeguards alongside the exemption."

Removing performance fees from charge caps got a boost Sept. 23 from U.K. Chancellor of the Exchequer Kwasi Kwarteng in the new government's "mini budget" aimed at stimulating economic growth and unlocking pension fund investments into U.K. assets. The idea got a lukewarm reception from pension experts, who cited several hurdles to more DC plan investment in alternatives, including scale of funds available to them and costs.