The Department of Work and Pensions (DWP) was met with outrage on Wednesday over its plans to water down the 0.75% automatic enrolment charge cap for pensions to exempt performance fees.
The move was met with widespread industry concern, with analysts commenting on the risky decision by the Government.
“The Government faces a predictable backlash from various corners of the pensions industry over controversial plans to water down the automatic enrolment charge cap,” said AJ Head of retirement policy Tom Selby.
“These concerns are entirely justified – any move to exempt performance-based fees from the charge cap risks leaving members’ exposed to higher costs.
The move will also reportedly see pension schemes with over £100 million in assets required to explain their policy on illiquid investments.
Responses in the industry have cited concern, with feedback pointing out that excluding performance fees from the charge cap would not serve to make a difference in trustee decisions on illiquid investments.
Further comments noted the risks that would follow if members’ investments were exposed to high fees.
The revisions to the pension policy were reportedly intended to increase the funds invested in green infrastructure projects and start-up companies, however this was met with no small level of pushback from experts.
“Of course, cost is just part of the value-for-money equation, and the key is whether these investments can justify the associated extra fees,” continued Selby.
“Policymakers clearly firmly believe illiquid investments can deliver better overall returns for members than more mainstream asset classes.”
“While there is some evidence to suggest this could be the case, there are no guarantees and many trustees will understandably be wary.”
“Ultimately trustees have a fiduciary duty to invest members’ hard-earned funds in a way that is most likely to deliver the biggest retirement pot possible.”
“Just because the Government wants pension schemes to help the UK ‘Build Back Better’ doesn’t mean those schemes will play ball.”
Some respondents argued that it seemed odd for performance fees to find themselves exempt in favour of a reduction in charges, given that enrolment schemes have an estimated 10 million workers’ funds in their collective pot.
Analysts have argued that economies of scale dictate falling percentage costs for investment managers in charge of assets, which should logically give way to a downside of pressure on the price cap.
“While 0.75% might be an appropriate level of charge cap for now, the competitive dynamics in the auto-enrolment market remain weak,” said Selby.
“It is entirely possible that developments in the market will mean that a 0.75% charge is viewed as excessive in 5 or 10 years’ time.”
“For the benefits of economies of scale to be passed on to members – rather than swallowed up as extra profits by fund managers – it is vital charges remain front-and-centre of the value-for-money debate.”
