Pension default fund charge cap of 0.75% could be eased

Under plans to allow them to make riskier, but possibly more lucrative investments in pension funds, workers might need to spend more than 0.75 percent to put aside.

Current charges for default funds could be reduced to allow workers to avoid performance fees.

For outperformance of long-term and thus illiquid green infrastructure, venture capital, or private equity projects, charges can reach up to 20%

Retirement savings. People who have jobs automatically opt into the employer’s plan unless they specifically object

The Government is encouraging more people to invest in UK-based high-risk investments. They claim they will provide greater returns and can help preserve employment, communities, and the environment.

According to financial professionals, pensions schemes must justify exceeding the 0.75 Percent cap. In order to save UK pensioners’ money, homegrown infrastructure projects and similar endeavors will be evaluated.

People who have jobs automatically opt into the employer’s retirement plan unless they object. If they do not, their money goes in their default or standard investment fund.

Around 90-95% of employees stick to their default fund regardless of whether or not it suits them.

Regulators announced last week that those who are not enrolled in workplace pension plans, such as the self-employed or people saving for retirement, may be able to access simple, new “default” pension funds.

However, the charges will not be limited to 0.75 percent as in other work funds. 

The Department for Work and Pensions today announced that it is conducting a consultation to exempt ‘well-designed performance fees’ from the cap on workplace fund charges.

Guy Opperman, Minister of Pensions says that he is proposing to give trustees more flexibility to gain access to a variety assets while protecting members from predatory charges.

According to the consultation document, although certain illiquid assets may be accessible without payment of performance fees, these are often required to access ‘the most liquid, highest risk, but possibly highest possible gross return investments’.

The article continues: “Investment managers often cite higher fees because of the superior returns they may achieve. These investments often require specialist active management and niche expertise, as well as greater engagement with business managers.

Performance fees can be a problem because they are usually charged at the end in a fund’s life, but accrue at regular intervals throughout the investment period.

The DWP suggested that they use a moving average over five years of performance fees in order to align them with default pension charges.

Tom Selby, head of retirement policy at AJ Bell, says: ‘As automatic enrolment pension schemes build scale, you’d naturally expect charges – and potentially the 0.75 per cent charge cap – to fall.

“However with the Treasury keen to increase investment into higher risk UK projects in particular infrastructure, DWP is looking to go the opposite direction and reduce the cap.

‘This would potentially make it easier for schemes to invest in vehicles operating a traditional ‘2:20’ charging structure – where upfront fees are 2 per cent, with the fund manager raking in 20 per cent of any outperformance above a certain agreed level.

“It’s crucial to remember that 2 percent of such a charging system would remain in the proposed charge cap.

Interactive Investor’s head of savings and pensions, Becky O’Connor says that the theory is reasonable, especially considering the forecasts for lower stock market growth over the long-term. However, it remains to be seen if the plan works in practice or if the return outweighs the additional charges.

“There is a possibility that promised returns may not materialize, even if higher fees are charged. This would be like middlemen paying more for less to pension scheme members. Higher fees should only be charged when they are justified.

If there is no stellar investment growth, it can be a huge difference in people’s retirement results.

“It is important to remember that the pension plan should have the main goal to help individuals save for retirement, not to fund risky infrastructure projects.

Brenda Kite is a Hymans Robertson pension expert. She says that the government does not expect allowing performance-related fees to be allowed for assets that are illiquid within the charge limit.

“Performance-related fees can be difficult to manage in defined contribution plans. They also raise questions about fairness between members.

“It’s important to keep in mind that UK pension funds are competing against the rest of world to invest in illiquid assets.

“We believe that there are other incentives for investment in this sector of the UK’s economy.