The Department for Work and Pensions (DWP) has said that it will engage further with the industry as it proceeds with its proposals to exclude performance fees from the 0.75 per cent charge cap on defined contribution (DC) default arrangements.

In its response to its consultation, Enabling Investment in Productive Finance, the DWP stated that it had received a “mixed reaction” to its proposals, recognising that the proposed change was “not positively received or supported” across the pensions sector.

However, it reaffirmed its belief that the proposal could lead the way in giving DC schemes used for auto-enrolment the flexibility and freedom to invest in illiquid assets, and said it would engage further with the industry as it pursues the changes.

“We are encouraged by the feedback we received that the policy intention we set out to only exempt ‘well-designed’ performance fees that are paid when an asset manager exceeds pre-determined performance targets is well intended,” it said.

“However, we recognise that all performance fees are not created equal and that the concept may be new to trustees. Therefore, we intend to consult on principle-based draft guidance alongside any proposed consultation on draft regulations.”

Although some respondents were supportive of the removal of performance fees from the cap, many did not believe the changes would be positive, including Scottish Widows, which stated that there was “no evidence to suggest that performance fees improve customer outcomes and we do not see a need for performance fees to be permitted in default funds in the first place. The charge cap offers valuable protection to savers.”

Also included in the consultation document, the government detailed proposals to bring forward legislation this year to reduce burdens and further open up private markets by removing restrictions that currently apply to large authorised master trusts.

The DWP said that the proposals would maintain saver protections whilst removing "disproportionate" red tape.

It is aiming for the changes to also reduce the costs of investment in private equity and debt.

In the Ministerial Foreword, Pensions Minister, Guy Opperman, said: “I am determined to pursue the path to opening illiquid asset classes to DC schemes.

“We want to ensure that, as we progress with this reform, trustees can get the best overall deal for members when investing in private equity and venture capital, balancing the potential benefits to members with the costs of paying higher than traditional fees.”

Commenting on the government’s consultation response, PLSA deputy director of policy, Joe Dabrowski, said: “We do not support changing the charge cap to exclude performance fees. The cap provides an important protection for millions of automatic enrolment savers.

"We have not seen enough evidence to suggest the change would improve outcomes for members. In our view, changes to the cap are also unlikely to fundamentally alter schemes’ ability to invest in illiquid assets or the volume of investments in the round.

“There are a number of important reasons for this: larger schemes are already incorporating private market illiquids into their default funds, and issues of scale mean the change will only impact a limited number of additional schemes; a focus on low charges in a competitive market; the prudent person principle which requires schemes to take careful consideration of risk and reward and operational barriers, such as the flexibility to move pots when requested; and daily dealing also play a part.

“We are also concerned by the proposal to require schemes to invest a certain percentage of their assets in illiquid assets or explain why they are not doing so. This may pressure trustees into breaching their fiduciary duty to only invest in the interests of their members.

“This should not prevent the government and the wider pensions industry taking a long-term view to the barriers to long-term investment for DC schemes. In particular, we would like to see more consideration of existing operational barriers, the impact of an uncertain regulatory environment, and greater product innovation.”

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