The Department for Work and Pensions (DWP) has launched a consultation on proposed changes to the regulatory charge cap for automatic enrolment defined contribution (DC) pension schemes to encourage greater investment in 'productive finance'.

The consultation, which is open until 18 January, will inform future policy to help ensure DC schemes are able to access a broader range of illiquid asset classes that have the potential to result in positive outcomes for members.

The proposals would enable automatic enrolment pension schemes to make greater use of performance-based fees, which are payable to an investment manager only if they generate high returns on their investments.

In particular, the proposals would look to extend the list of charges excluded from the pensions charge cap to include well-designed performance fees that are paid when an asset manager exceeds pre-determined performance targets.

The exemption would not apply to fees that are not related to performance, with all other investment administration charges currently in scope of the cap to remain.

The exclusion from the charge cap aims to help schemes overcome barriers to long-term investment and provide new opportunities to invest in areas such as British business, start-ups and green projects.

The DWP also noted, however, that some large schemes are currently in the midst of negotiating more appropriate fee structures to overcome operational issues with private equity managers and others.

“We would not wish to undermine this negotiation and interfere with market forces,” it said.

“Separately, many large master trust providers have already taken the view that they will not pay performance fees of any kind. The government passes no comment on this recognising that this is a commercial judgement.

Commenting on the plans, Pensions Minister, Guy Opperman, said: “As automatic enrolment has developed, we have always wanted to ensure the best outcomes for members.

“This consultation will look at ways to enable schemes to take advantage of long-term, illiquid investment opportunities and provide better returns for members.

“Lifting these barriers can also help contribute to the key role finance has in tackling climate change, by mobilising private finance towards clean and resilient growth and addressing market barriers to longer-term investing in green projects.”

The proposals build on the governments previous consultations around illiquid investments, with DWP stating that responses from these previous consultations suggested that there was industry support for the objective of providing trustees with greater flexibility when it comes to performance fees and the charge cap.

In light of this, the consultation will seek to consider the ways government could facilitate this, whilst also ensuring that the current protections in place to shield members from high and unfair charges are not diluted.

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