Performance-based fee pension scheme proposals

The Department for Work and Pensions (DWP) has put forward proposals designed to make it easier for pension savers to access different types of investments.

The DWP proposals would enable automatic enrolment workplace pension schemes to make greater use of performance-based fees, payable to an investment manager only if they generate higher returns on their investments.

These fees to investment managers are currently included in the pension scheme charge cap, limiting the scope for using performance-based fees.

Under the proposal, the DWP would allow pension schemes to exclude these performance fees from the charge cap if schemes choose to utilise them.

Allowing the use of performance-based fees could mean pension schemes have access to longer-term investment options and provide opportunities for investment in areas including British start-up businesses and green projects.

The goal behind these proposals is to make it easier for pension schemes to access new investment channels, including the infrastructure required for the UK’s transition to net zero.

These ‘illiquid investments’ tend to be better suited to long-term investments, as they can be hard to access as cash in the short term.

Theoretically, illiquid investments can deliver higher returns to pension investors, but they also come with higher levels of risk.

Guy Opperman, Minister for Pensions, said:

“As automatic enrolment has developed, we have always wanted to ensure the best outcomes for members. This consultation will look at ways to enable schemes to take advantage of long-term, illiquid investment opportunities and provide better returns for members.

“Lifting these barriers can also help contribute to the key role finance has in tackling climate change, by mobilising private finance towards clean and resilient growth and addressing market barriers to longer-term investing in green projects.”

The ‘Enabling Investment in Productive Finance’ consultation, announced at the Budget, builds upon the principles laid out in previous consultations on improving member outcomes and addressing barriers to long-term illiquid investment.

Responses from these previous consultations have highlighted industry support for the objective of providing trustees with greater flexibility when it comes to performance fees and the charge cap.

The latest consultation will investigate ways the government can facilitate that, while ensuring that the current protections in place to shield members from high and unfair charges are not diluted.