A change to fee-cap rules will not achieve the government's aim of increasing investment in illiquid assets by U.K. defined contribution plans, the Pensions and Lifetime Savings Association said.
The U.K. government proposed in March that DC plans should be allowed to spread illiquid investment fees — such as those for infrastructure, private equity or venture capital — over multiple years, with the aim of improving participants' retirement outcomes.
DC default funds are currently constrained by a 0.75% fee cap on assets under management and administration.
While the PLSA was supportive of the proposal, it said challenges besides fees remain and need to be solved before the proportion of U.K. DC plans investing in illiquid assets can grow.
"We do not believe that the alterations will lead to a material change in the volume of investment in illiquids," said Nigel Peaple, director of policy and advocacy at the PLSA, in an emailed comment. "A focus by trustees on securing low charges in a competitive market; the prudent person principle, which requires schemes to take careful consideration of risk and reward; and operational barriers, such as the flexibility to move pots when requested and daily dealing, are likely to always result in only a very low proportion of scheme investment in such assets."
The PLSA said in its response to the consultation that there are contradictions in U.K. public policy regarding U.K. DC plans. On the one hand, employers are required to keep charges low for plan participants and consider outsourcing to consolidators known as master trusts. On the other hand, there is a growing expectation to kick-start the post-COVID-19 economy by encouraging retirement plans to invest in infrastructure projects.
The proposed rules are likely to be helpful by smoothing out periods of higher fees due to high performance, the PLSA said. However, the charge cap would still be a barrier if illiquid investments were to achieve consistently high returns — and therefore high performance fees.
For example, having a 5% allocation to venture capital in a default fund could effectively double the total cost associated with the management of the investment portfolio, the PLSA said. If there is a danger of breaching the charge cap trustees will not invest, the PLSA added. Some trustees may also be wary of explaining to plan participants why charges might vary over different years.
The PLSA said there are also operational barriers that might discourage DC plans from investing in illiquid assets, such as when a participant wishes to move savings to a different plan or provider. To do so promptly, plans might need to offset withdrawal requests by using contributions. However, managing these offsets requires managing risks and costs and treating participants fairly, the PLSA added.