News for trust-based schemes
In March 2021, the DWP launched a new consultation on proposed measures to enable occupational DC pension schemes to include performance fees within the charge cap.
The consultation is seeking views on a legislative change to the way compliance with the charge cap is measured. This would give trustees flexibility to smooth such charges over a longer period in order to help facilitate investment in a more diverse range of investments including illiquid assets, with the potential for higher returns.
Currently, charges that can be imposed on DC default fund members in any given year can be calculated using two methods. The ‘retrospective method’ involves looking back on the year’s data and calculating the maximum level of charges that can be imposed on a member. The ‘prospective method’ involves calculating the effect of the charges regime on a member’s pot, assuming there is no growth to the value, in order to ensure compliance with the 0.75% charge cap.
The proposed measures would enable schemes to use a moving average of accrued performance fees, spanning over a five year rolling period, rather than using the performance fees accrued in a single year. This would permit schemes to temporarily exceed the 0.75% charge cap when performance has been good on the provision that, at the end of that multi-year period, the average charge to members was within the charge cap limit. The consultation paper includes illustrations of how fees would be measured in practice.
The consultation also considered the current position on ‘look-through’ in relation to charge cap compliance. Currently, where an occupational DC scheme invests in any fund of funds or pooled investment vehicles, the trustees should not just incorporate the costs of investing in the pooled vehicle, but should ‘look-through’ this structure and consider the costs paid by the pooled vehicle manager as it invests in the underlying investments. The government emphasised that look-through should apply when investing in all open-ended funds, all UK listed closed-ended investment funds and international equivalents.
The current position on look through seems to limit the extent to which the innovation described above can be achieved. Indeed, stakeholders have suggested that the requirement for trustees to look-through to underlying investment costs may limit product innovation in relation to DC schemes. Views were therefore sought as to whether the treatment of look through costs is a potential barrier to investment in alternative asset classes such as venture capital and growth equity.
The consultation closed on 16 April 2021. The DWP aims to publish a response in June 2021, as part of its wider response to the September 2020 consultation which was aimed at improving retirement outcomes for members of DC schemes. The regulations on performance fees are expected to come into force from October 2021.