Removing performance fees from charge cap won't 'open flood gates' to illiquid assets

The DWP has today launched a consultation, 'Enabling investment in productive finance' which proposes changes to the DC scheme charge cap. The consultation was announced in the Budget in October as a way to unlock more investment in illiquid assets.

Stephen Budge, Partner at LCP, commented: “We welcome the government’s intention to make it easier for DC pension savers to access an even wider range of illiquid asset classes – those that are only available with a performance-related fee. The government’s proposal is, on the face of it, quite straightforward and in our view, an improvement to the 5-year smoothing mechanism. However, as the government acknowledges, there are several traps to avoid.

"We agree that transparency of performance fees should be a priority but are reluctant to endorse the government’s proposals that this should be only done through the Chair’s Statement, given very few members actually read these documents. Our view is that all costs and charges reporting, including performance related elements should be part of a more accessible document.

Tim Box, Senior Consultant in LCP's Research team, added: We still remain concerned that performance related fees could impact unfairly on members, for example, for members when joining a new pension scheme. They may suffer a higher charge without having received the benefit of better performance. That said, this proposed approach has additional benefits over the 5-year smoothing approach which should apportion the performance fee more quickly and appropriately across members

Additionally, we are not convinced that simply removing performance fees from the charge cap will open the flood gates, given the reluctance of trustees to use these much higher cost investments. Equally, the potentially confusing message to members about the fees, how variable they could be and that they could be above the 75bps over the course of a year may be off-putting to some trustees. That said, the interest and appetite will very much depend on the product offerings available from managers for DC scheme trustees to consider.”