The government has launched a consultation on proposed measures to allow occupational defined contribution (DC) schemes to smooth performance fees within the charge cap, alongside a call for evidence on issues relating to look-through.

In particular, it is consulting on a legislative change to the way compliance with the charge cap is measured to give trustees flexibility to smooth such charges over a longer period, in order to help facilitate investment in a diverse range of assets, including illiquid.

The consultation, which was announced as part of the government’s Spring Budget, is the next step to the Improving outcomes for members of DC schemes, which was published in September 2020.

It also includes the government response to chapter three of prior consultation, which stated that the government was “very pleased” with the level of support received for the proposed measure to provide a prorated easement to performance fees.

As such, it confirmed that it will move forward with a very similar version of the regulations previously consulted on, with an expectation that these will be in place by October 2021.

However, it clarified that the government remains “open” to finding further was in which it can facilitate opportunities for DC pension schemes to access private markets balanced with by the importance of the charge cap as a protection for scheme members.

In addition to this, the government response stated that it was “equally pleased” with the positive reaction to the idea of introducing the option of a multi-year rolling/averaging period to accommodate performance fees fort he purpose of the charge cap calculation.

Whilst it acknowledged that some stakeholders’ had a preference for a longer rolling period of ten years or more, it stated that this was considered “too long a period” by which fund managers will be able to accurately predict the level of performance fees, and that a longer rolling period could promote greater risk taking in early years.

It also acknowledged that whilst this is likely to present an administrative challenge, especially for larger schemes with more members, it believes "this is something that schemes will embrace and make work for them in order to take advantage of the investments that can potentially yield greater returns for members".

Alongside this, the government is also seeking views on its position around look-through in relation to charge cap compliance, whether it acts as a significant barrier to investment in alternative asset classes, particularly venture capital and growth equity, and if so, what solutions should be considered.

Whilst this was not an area included in this initial consultation, the government has now launched a call for evidence, after stakeholders raised concerns in context of other questions on performance fees or consideration of physical assets.

The government has also provided an update on the developments since the first consultation was published in September 2020, including developments made by the Productive Finance Working Group.

It confirmed that the group is currently looking to deliver the Long-term Asset Fund proposal outlined by the Asset Management Taskforce’s UK Funds Regime Working Group, and is working to design the new fund structure to suit the needs of investors, including DC schemes, with the aim of having the LTAF set up by the end of 2021.

The government stated that it intends to responds to todays consultation, as well as the remaining chapters of the prior consultation, at the same time as publishing final statutory guidance and regulations in June 2021, with the expectation that regulations will come into force in October 2021.

Commenting in the foreword, Pensions Minister, Guy Opperman, stated: "Never has there been a better or more important time for a DC pension scheme to consider innovating their investment strategy.

"Investment in emerging sectors like green infrastructure or innovative British companies fits well with the long-term horizons of DC schemes, and are vital to helping sustain employment, our communities and the environment.

"I commend schemes that are already making progress in this area but we fall behind our global partners in our commitment to these asset classes domestically and the economy as a whole suffers for it.

"That is why I am bringing forward draft regulations, building on the policy proposed previously by the government, which would allow schemes to smooth the incurrence of performance fees, which are often payable on illiquid investments, over five years.

"The hope is that this will give trustees, especially those who might be unsure about investing in illiquid assets, greater confidence to make that leap, safe in the knowledge that they can deliver the best possible return for their members."

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