Performance fees incurred by U.K. defined contribution plans investing in illiquid assets may be smoothed for five years starting Oct. 1, the government said.
Following a consultation with the industry on encouraging investment in illiquid assets, the government said it will move ahead with a proposal to allow for performance fees associated with private equity, infrastructure and other alternatives to be accounted for over a five-year period, rather than one year. The aim is to help DC plans to invest in illiquids without breaching an annual charge cap of 0.75% of plan assets.
The government received 35 responses to a March consultation on the proposal, with the overwhelming majority of respondents supporting the objective of giving DC plan trustees flexibility to incorporate performance fees within the charge cap.
Some respondents proposed that performance fees should be completely or partially removed from the charge cap. "However, Government believes that carried interest is a cost and should be subject to a cap in the same way as other investment costs," the government said in a document outlining responses and its decision. "Some respondents suggested that the Government should therefore not cap a cost that is only incurred when members receive higher net returns. We have concluded that the charge cap and inclusion of performance fees within it protect members from high fees that do not improve value for money."
The move was, in general, welcomed by the Pensions and Lifetime Savings Association. "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," said Joe Dabrowski, deputy director, policy, in an emailed comment. "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."
However, the PLSA warned that other factors such as the cost and transparency of illiquid investments, as well as the competitive and consolidating nature of the U.K. DC market, means the changes "will only have a minor impact on asset allocation and there is unlikely to be a wholesale switch into illiquid investments."
Also Monday, the Department for Work and Pensions launched a new consultation paper on further consolidation in the DC market.
"We know from other countries such as Australia that scale is the biggest driver in achieving value for money for savers and ultimately better retirement outcomes," said Guy Opperman, minister for Pensions and Financial Inclusion, in an introduction to the paper. "Further consolidation will drive better outcomes for members through better governance and greater investment in illiquid assets."
The government in September launched a consultation on new regulations to require trustees with plans smaller than £100 million ($141 million) in assets to justify their continued existence via a newly introduced "value for members" assessment. The assessment comes into force in the fall.
That assessment marked "phase one and now we turn to phase two which will be looking to drive consolidation further and faster," Mr. Opperman said.
There were 1,560 DC plans in the U.K. in 2020 and 36 authorized multiemployer DC plans known as master trusts, which have more than £52.7 billion. The number of DC plans has been falling by 8% to 10% each year, with the government predicting that there will be about 1,000 DC plans operating in five years' time.
The latest consultation will look at barriers and opportunities to greater consolidation of retirement plans with between £100 million and £5 billion in assets. The government wants to know in particular about incentives for consolidation among these plans.
Responses to the latest consultation should be sent by email to the DWP by July 30. The government aims to publish its own response later this year.
