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PwC comments on the Government’s consultation on proposed changes to the regulatory charge cap that applies to defined contribution pension schemes

The Department of Work and Pensions has issued an open consultation on enabling investment in productive finance. The government is consulting on proposed changes to the regulatory charge cap that applies to the default funds of occupational defined contribution (DC) pension schemes used for automatic enrolment. This is to 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.

Raj Mody, pensions partner at PwC, comments: 

“The consultation proposes a relatively simple change to the way the charge cap for DC auto-enrolment pensions works, by excluding performance fees from it. 

“In some ways, this is a good compromise. It keeps the consumer protection which the charge cap was implemented for in the first place. At the same time it opens up to funds more scope to allocate some of their portfolio to more innovative, and higher cost, investments - such as private equity, venture capital, infrastructure and private credit.

“In many cases, it's quite possible that the total charge still remains within the charge cap of 0.75% per annum. So this will be as much a strategic and commercial decision for providers, as it is a decision to do with costs. Of course, larger allocations to higher cost funds will start to breach the cap even if excluding performance fees. And there may be providers who, for their own policy reasons, want to avoid investments which have direct performance-based charges altogether. There is still a governance overhead from running a more complex portfolio.

“One design feature which is still difficult to deal with is paying out higher fees when performance over a particular time period is high, but then not being able to recoup those if performance suffers after that. It's difficult for the government to create a detailed design which anticipates all possible variations of outcomes. In the end, it will still be up to scheme managers to agree suitable deals with those who manage their selected investments.”


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Alice Bowdery

Alice Bowdery

Manager, media relations, PwC United Kingdom

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