Industry experts have raised concerns that government proposals to remove performance fees from the defined contribution (DC) charge cap could risk undermining member protections, emphasising the need to keep pension savers in mind.

The government recently consulted on proposed changes to the regulatory charge cap for automatic enrolment (AE) DC pension schemes to encourage greater investment in 'productive finance'.

In its response, however, the Pensions and Lifetime Savings Association (PLSA) argued that there was “no case” for removing performance fees from the DC charge cap, stating that any potential changes must demonstrate a positive impact.

PLSA deputy director of policy, Joe Dabrowski, explained: “We believe that this risks diluting an important protection for AE savers, without sufficient evidence at this time to demonstrate a change is needed or higher fees will improve member outcomes.

“Given the various other developments in this area over the past year – including the introduction of a mechanism to ‘smooth’ the calculation of performance fees over five years, and the introduction of a new fund framework to help investors make long-term investments – industry needs time to implement, develop and review their effectiveness before making further changes.

“The underlying structural dynamics of the current AE market are also unlikely to result in the proposed changes succeeding in its intended goal."

These concerns were echoed by Isio senior DC investment consultant, Jenny Roe, who warned that the proposals to remove performance-based fees from the charge cap seemed to be “a reactive" and "imperfect fix to a problem requiring a more radical solution”.

She explained: “We acknowledge that investment in illiquid asset classes by DC pension schemes is currently hampered, however removing performance related fees won’t move the needle on illiquid allocations.

“There are bigger obstacles around fund structures, complexity and lack of available funds on DC platforms which need a more radical solution.

“Removing performance fees from the charge cap also has the potential to dilute member protections, making charges much less transparent.

“There’s a real risk that providers try to hide their fees, therefore making investing in illiquid assets more attractive. Simply requiring disclosure in the Chair’s Statement, which is rarely reviewed, is not the answer.”

Aegon pensions director, Steven Cameron, warned that the changes could risk undermining the current simple messages around the protection members receive from the cap.

“Investing in any form of illiquids is complex, requiring detailed scenario testing of the likely additional risk, returns and costs over various time periods and allowing for changing market conditions," he said.

"Choosing investments with performance fees adds a further layer of complexity and ensuring these are well-designed will be key to ensuring members truly benefit."

Cameron also noted that DC members expect to be able to switch funds, transfer to a new scheme or access their benefits flexibly without the delay of a notice period, suggesting that this makes finding solutions to daily pricing and liquidity management of higher priority than enabling performance fees.

In addition to this, The Investing and Saving Alliance (Tisa) said that it is “crucial” that the correct support and guidance is given to governance boards, to ensure they have the necessary information to make investment decisions involving assets with performance fees attached.

“While net returns can be higher in these asset classes, there are other aspects that need to be considered from a value for money perspective,” Tisa head of retirement, Renny Biggins, commented.

“Cost remains a major factor for many decision makers when choosing an appropriate auto-enrolment investment strategy for their workforce. A potential increase in costs, irrespective of the trade-off of more stable and higher longer term net returns, may not immediately incentivise these decision-makers.

“An aim of the continued drive for better value for money within the auto-enrolment framework should therefore be to inform this group about the potential benefits of including illiquid assets within their default investment strategies."

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