On 30 January 2023 the government published their response to chapters 2 and 3 of the paper on Broadening the investment opportunities of DC pension schemes. AREF'S response to the consultation, which had been published in October 2022 by the Department for Work and Pensions (DWP), can be found here.
The Government's aim is for DC pension schemes to consider the value of investing in illiquid investments and in doing so unlocking pension fund investments in assets that can benefit the UK economy.
‘Disclose and Explain’ policies on illiquid investment
In chapter 2 of the October 2022 paper, the government provided their response to the views they received regarding the Disclose and Explain Policy Proposals in Facilitating Investment in illiquid assets by DC pension schemes published in March 2022. They consulted on draft regulations and guidance to achieve the policy intent. The Government received broad support for the regulations and guidance as set out. In their response in January 2023, they provided details of a few changes they had made to strengthen the regulations and guidance as suggested by respondents to the consultation.
The requirement for DC pension schemes to disclose and explain their policies on illiquid investment as well as their full asset allocations are expected to take effect from 1 October 2023..
‘Exempting performance-based fees from the regulatory charge cap’ - Draft regulations and statutory guidance
In chapter 3 of the paper published in October 2022, the government sought views on draft regulations and guidance on the exemption of performance-based fees from the regulatory charge cap proposals. These were designed to stimulate illiquid investment by occupational DC pension schemes. The policy proposals were first outlined in their November 2021 consultation Enabling investment in productive finance and have been developed further following the feedback the government received to that consultation and further follow-up engagement with a range of industry stakeholders.
After considering the response to the draft regulations and guidance, the government made some changes where they they felt they were needed. These included the following:
- Enabling fund of fund/collective arrangements to benefit from the change.
- When renegotiation of performance-based fees agreements is permitted.
- Explicitly covering in the definition of a specified performance-based fee, profit-sharing arrangements that include carried interest arrangements
- Permitting schemes to disclose where performance-based fees relate to the direct investments they apply to, if they wish.
- Including reference to the Productive Finance Working Group guidelines.
- Making it clear that fees can be paid by a third party on behalf of the trustee or manager.
- Clarifying that relevent occupational schemes must access the extent to which they represent good value for members. Schemes with under £100m in assets will not be required to include any specifed performance-based fees as part of their extended value for member comparison against three larger schemes.
The regulations and guidance exempting well designed performance-based fees from the charge cap are expected to be implemented in spring 2023. This change is intended to enable DC pension scheme to invest in illiquid assets including the Long Term Asset Fund (LTAF). The Government believe it will encourage scheme trustees, managers, and advisors to collaborate with fund managers to explore a fuller range of investment products and opportunities that have the potential to deliver better longer-term net returns for pension savers.
More details about the papers the government have published on enabling DC pensions schemes to invest in illiquid assets and AREF’s responses can be found here. AREF’s Public Policy Committee have been overseeing AREF’s response to the DWP consultations in relation to this. If you wish to know more please contact Jacqui Bungay, Policy Secretariat ([email protected]).
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