By revising the 0.75 percent charge cap, Chancellor Kwasi Kwarteng has pledged to release billions of pounds of pension scheme investments in innovative UK companies.
The restriction restricts how much pension providers can charge individuals who are automatically enrolled in their employer’s “default” fund.
Unless they deliberately choose alternative assets within their scheme, this is where the majority of workers put their retirement money.
The government has already consulted on loosening the cap regulations to permit greater performance fees, often paid on illiquid and high-risk investments, such as infrastructure and sustainable projects, with the potential for larger returns.
Kwarteng’s new growth plan indicates that it would proceed with this plan, ‘providing defined contribution pension plans the clarity and freedom to invest in the United Kingdom’s most creative enterprises and productive assets, hence enabling chances to give higher returns to savers.
According to the government, ‘well-designed’ performance fees would be removed from the cap.
Kwarteng will also contribute up to £500 million to encourage new funds that enable pension systems to invest savers’ cash in innovative science and technology enterprises in the United Kingdom.
According to the government, the Long-Term Investment for Technology & Science (LIFTS) competition will unlock billions of pounds of new investment in UK companies over time.
In the meantime, Kwarteng has announced plans to expand the ‘generosity and availability of the Seed Enterprise Investment Scheme (SEIS) and has hinted at future expansions of Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT).
These schemes give large tax relief for investing in niche, unquoted, or AIM-listed companies at the riskier end of the scale, and are typically utilized by rich and savvy investors.
What do pension professionals say?
Steven Cameron, pensions director at Aegon, explains, “The mini-budget reaffirmed the charge cap for worker pensions will be loosened to allow schemes to increase their investments in illiquid assets as part of the government’s growth objective.”
The government is determined to unleash the investment “superpower” of workplace pensions and expand investments in less liquid, longer-term assets.
‘These investments may offer better returns, but they may also incur higher expenses, and some are subject to performance fees that cannot be predicted in advance.
Faced with unpredictable performance fees, schemes are concerned that such investments could cause costs to exceed the 0.75 percent limit for automatic enrolment in workplace pension default funds.
Cameron asserts that a slight increase in fees in exchange for a larger increase in investment returns could raise people’s pension funds, but they will need to be informed of the possible investment benefits.
Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown explain: ‘The debate has raged for many years about how UK pensions may invest in illiquid assets such as infrastructure in the same manner as foreign pension systems.
“Cost has been a significant obstacle to this, and any steps to reassess the charge cap as described today would be a significant advance.
While the cap was enacted to guarantee that people received a fair value from their pension plans, the cost is not the primary determinant of value.
‘However, the key to success will be striking a balance between providing possibilities that people want to participate in at a reasonable price, and the concept of ‘well-designed performance fees’ will be crucial.’
Callum Stewart, head of the defined contribution investing at Hymans Robertson, says, ‘We recognize that additional investment in illiquid assets by DC schemes might make a significant contribution to projects such as renewable energy.’
‘If we can also utilize this to engage members in their pension savings – because they can physically see the good their money is making – we may also be able to convince them to contribute more to their pension funds.
This will contribute to an improvement in long-term outcomes overall.
However, we remain worried that in a time of heightened anxiety for many, comments about the charge cap are just obscuring their concerns.
“Within the sector, we fear that pension savings will be the first to be slashed, resulting in an ever-increasing number of current and future retirees falling into poverty.”
Bob Campion, senior portfolio manager at Charles Stanley Fiduciary Management, explains, “While performance fees can help align the interests of fund managers and their clients, it would be a heroic assumption to believe that excluding performance fees from a cap for defined contribution members would result in better outcomes for them.”
There is no reason to expect that paying higher fees to fund managers will result in superior performance. Chancellor Kwasi Kwarteng should not look on residents of the District of Columbia for the “new sources of capital investment” he believes are necessary.
