Enabling occupational schemes to take advantage of long-term illiquid investment is one of the government’s key priorities. To achieve this they have proposed and drafted regulations and statutory guidance as detailed below. Also, the Pensions Regulator (TPR) has produced guidance which assists pension schemes invest in illiquid assets.
In October 2023, AREF submitted proposals for unlocking DC pension investment in advance of the Chancellor's Autumn Statement.
TPR - New 'Private markets investment' guidance
On 24 January 2024, the TPR published new guidance on Private markets investment to help pension scheme trustees consider better outcomes for savers by investing in private market assets, including real estate. This guidance may also be of interest to the LGPSs and advisors. The guidance includes specific matters to be considered by DB pension schemes and DC pension schemes, including value for money. Also, there is a section within the guidance on performance fees.
The guidance refers to the Pensions and Lifetime Savings Association's (PLSA's) report Pension Scheme Investment in Illiquid Assets - Case Studies from the Pension Sector.
TPR - Update to guidance for DC pension schemes
On 24 August 2023 The Pensions Regulator (TPR) updated its guidance to help DC pension schemes comply with new regulations designed to ensure they consider all the investment opportunities available to achieve best value for savers:
From 1 October 2023 trustees must state their policy on investing in illiquid assets in the statement of investment principles for their scheme’s default arrangements.
Trustees will also be required to disclose the asset class breakdown for each of their scheme’s default arrangements in the chair’s statement.
The new regulations have also removed a regulatory barrier that may have hindered trustees from exploring investment in certain funds that came with performance fees. Since 6 April 2023, trustees have had the option to exclude specified performance-based fees from the list of charges falling within the regulatory charge cap limit of 0.75% per annum. To ensure transparency, schemes must disclose in their chair’s statement any performance-based fees incurred in relation to each of their default arrangements, calculated as a percentage of the average value of the assets held in those defaults.
Trustees must robustly assess the extent to which these fees represent good value for their savers alongside other costs and charges.
The TPR's press release "Focus on value from DC pension investments set to increase after regulation changes" can be found here.
DWP - Broadening the investment opportunities of DC pension schemes
On 30 January 2023, the Department for Work and Pensions (DWP) published the Government's response to its October 2022 paper on Broadening the investment opportunities of DC pension schemes. More details about the paper and the government's response can be found here. AREF sent it's response to this consultation on 10 November 2022.
The October 2022 paper provided the Government’s response to the views they received regarding the Disclose and Explain Policy Proposals in Facilitating Investment in illiquid assets by DC pension schemes. They consulted on draft regulations and guidance to achieve the policy intent.
The government sought views on draft regulations and guidance on the exemption of performance-based fees from the regulatory charge cap proposals designed to stimulate illiquid investment by occupational DC pension schemes. The policy proposals were first outlined in their 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.
DWP - Facilitating investment in illiquid assets
DWP published Facilitating investment in illiquid assets on 30 March 2022. This provided feedback on the Enabling Investment in Productive Finance consultation and the Future of the defined contribution market call for evidence. Also, it included consultations on new ‘Disclose and Explain’ proposals and proposed updates to ‘Employer-related investment’ regulations.
The ‘Disclose and Explain’ proposals were to amend the Statement of Investment Principles (SIP) requirements to ensure that relevant defined contribution (DC) pension schemes disclose and explain their policies on illiquid investment. Also, the Government proposed to introduce regulations that require relevant DC schemes with over £100million in total assets to publicly disclose and explain their default asset class allocation in their annual Chair’s Statement.
On 11 May 2022 AREF submitted its response to this consultation.
DWP - Enabling Investment in Productive Finance
On 30 November 2021 DWP published a consultation, Enabling Investment in Productive Finance, on removing performance fees and carried interest from the charge cap for defined contribution (DC) pension schemes.
The charge cap, which was introduced in 2015, applies to the default funds of DC schemes used for automatic enrolment. It prevents schemes from incurring costs and charges of more than 0.75% annually. This includes the management fees and costs of underlying funds through which schemes invest. This discourages investment in illiquid assets for which the costs are typically relatively higher than, for example, investment in listed equities. Performance fees are particularly problematic as they increase as performance improves, so pension funds can be penalised if investments perform better than expected.
The proposal to exclude performance fees is welcomed by AREF and is something which we have previously lobbied for in our responses to earlier DWP consultations including the one in Spring 2021 on Incorporating performance fees within the charge cap. We believe that carried interest and similarly structured performance fees should be regarded as a profit share rather than a fee.
AREF submitted it's response to this consultation on 18 January 2022.
The Government received mixed feedback on the Enabling Investment in Productive Finance consultation. It received positive support from many, including AREF, that the proposed change has the potential to remove a real barrier to schemes that want to invest in illiquid assets. However, there was not support across the entirety of the pensions sector and other interested groups more widely. Therefore, the Government is going to take its time in fully understanding all the concerns raised and engage further to ensure these are addressed when designing policy.
DWP - Future of the defined contribution pension market: the case for greater consolidation
On 21 June 2021 DWP published a call for evidence on the Future of the defined contribution pension market: the case for greater consolidation. AREF didn't response to this.
DWP - Incorporating performance fees within the charge cap
On 21 June 2021 DWP published their response to their consultations on Improving outcomes for members of DC schemes and Incorporating performance fees within the charge cap. More details about this response can be found here.
In March 2021 DWP had published the consultation on Incorporating performance fees within the charge cap.
Included in this consultation was the Government's response to Chapter 3 'Diversification, performance fees and the default fund charge cap’ of the 2020 consultation Improving outcomes for members of defined contribution schemes. It also consulted on additional changes to regulations designed to facilitate the diversification of DC investment portfolios.
AREF submitted a response to the consultation in April 2021.
DWP - Improving outcomes for members of defined contribution schemes
In September 2020, DWP published the consultation Improving outcomes for members of defined contribution schemes. This included the Government’s response to the consultation Investment Innovation and Future Consolidation: A Consultation on the Consideration of Illiquid Assets and the Development of Scale in Occupational DC schemes. It also consulted further on changes to regulations and statutory guidance designed to improve DC pension scheme governance, promote the diversification of investment portfolios and signal our commitment to transparent disclosure to scheme members.
DWP - Illiquid Assets and the Development of Scale in Occupational DC schemes
In February 2019, DWP published the consultation Investment Innovation and Future Consolidation: A Consultation on the Consideration of Illiquid Assets and the Development of Scale in Occupational DC schemes.
AREF submitted a response to this consultation in March 2019.
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