UK retirement schemes urged to ‘shift focus’ from low charges

Pensions industry updates

The UK Treasury, regulators and the Bank of England have urged the pension industry to “shift focus” from keeping savers’ costs low to help the nation’s post-Covid recovery.

A working group, headed by the BoE, Treasury and Financial Conduct Authority, said in a report published on Monday that an “excessive” focus by the industry on low charges had led to investments in long-term assets, which usually impose higher costs, being “overlooked”.

The Productive Finance Working Group was formed in 2020 with the purpose of rerouting more of the £500bn in assets held by thousands of defined contribution (DC) pension schemes to investments seen as crucial to the success of the UK economy, and of potential benefit to retirement investors.

In its report, the working group said a 0.75 per cent charge cap — introduced by the Department for Work and Pensions in 2015 to protect workplace retirement savers from “inappropriate” fees — could be deterring schemes from investing in long-term assets.

“Since the introduction of automatic enrolment, several million low and middle-income workers have been placed into pension saving for the first time and, against a historic backdrop of high charges, the cap has encouraged competition around fees and resulted in lower charges for members,” it said.

“However, the evidence we have gathered suggests that there is an excessive focus on cost in the industry, rather than long-term value. We believe it is vital to shift the focus decisively to long-term value for members and develop suitable products that will enable schemes to access a wider range of investments, which may offer the opportunity to improve member outcomes in retirement.”

The report said that many DC schemes, which do not deliver a guaranteed retirement pot, were “sceptical” about the value, necessity and complexity of performance fees typically levied by private equity and venture capital operators. These groups usually manage the long-term investments the government is keen to stimulate investment in.

However, the study did not recommend that these performance fees, which are paid when a manager exceeds a pre-determined target, be reformed but said asset managers and DC schemes “should work together” to consider appropriate methodologies to “accommodate” performance fees within the charge cap. 

“As schemes continue to consolidate, DWP should consider in the future how to reconcile performance fees with the purpose of the charge cap and trustees’ ability to invest in a broad range of assets, including less liquid ones,” it added.

A survey of 22 DC schemes and asset managers by the Financial Times this month found widespread reluctance to invest in so-called illiquid assets, such as infrastructure and private equity.

To “shift the focus” from cost to long-term value, the report also recommended “proactive communication” by DWP and the Pensions Regulator to encourage DC scheme decision makers (including trustees) and consultants to “actively” consider increasing their allocations to illiquid assets.

Investment experts said the focus in the report on the impact of the charge cap, which was introduced by the DWP, was a red herring.

“Pension schemes would be keen to invest more in illiquid assets but there remain considerable practical barriers which the government and regulators are yet to address,” said Laura Myers, a partner and head of the DC Practice at LCP, the actuarial consultants.

“Some schemes have been scarred by the experience of seeing property funds ‘gated’, leaving members unable to access their savings.”

The Alternative Investment Management Association (AIMA), which is a member of the working group, welcomed the report, which also included a range of recommendations to address concerns over the increased investment by schemes in less liquid assets.

“This report is an important step forward for UK investors looking to safeguard their retirement,” said AIMA.

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