UK pension plans urged to ‘focus’ on low charges
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The British Treasury, regulators and the Bank of England have urged the pension industry to “shift focus” and no longer keep savings costs low to help the country recover from Covid.
A task force, led by the BoE, the Treasury and Financial Conduct Authority, said in a report released Monday that an “excessive” industry focus on low charges had led to investments in long-term assets , which generally impose higher costs, being “overlooked”.
The Productive Finance Task Force was formed in 2020 with the aim of redirecting more of the £ 500bn of assets held by thousands of Defined Contribution (DC) pension plans to investments considered essential to the success of the UK economy and potentially beneficial to retirement investors.
In its report, the task force said that a 0.75% cap – introduced by the Department of Work and Pensions in 2015 to protect workplace retirement savers from “inappropriate” charges – could deter plans invest in long-term assets.
“Since the introduction of automatic enrollment, several million low- and middle-income workers have been placed in retirement savings for the first time and, against a historical background of high charges, the cap has encouraged competition around membership fees and reduced costs for members. , “It said.
“However, the evidence we have gathered suggests that there is an excessive focus on costs in the industry, rather than long term value. We believe it is essential to focus decisively on the long-term value for members and to develop tailored products that will allow plans to access a wider range of investments, which may provide the opportunity to improve the results of retired members. ”
The report says that many defined contribution plans, which do not offer a guaranteed retirement fund, were “skeptical” about the value, necessity and complexity of the performance fees typically charged by private equity operators and venture capital. These groups usually manage the long-term investments in which the government wishes to stimulate investment.
However, the study did not recommend that these performance fees, which are paid when a manager exceeds a predetermined target, be reformed, but said asset managers and DC schemes “should work together” to consider appropriate methodologies to “accommodate” performance fees within the load cap.
“As the programs continue to consolidate, DWP should consider in the future how to balance performance fees with the goal of the fee cap and the ability of the Trustees to invest in a wide range of assets, including assets. less liquid, ”he added.
A survey this month of 22 DC plans and asset managers by the Financial Times revealed widespread reluctance to invest in so-called illiquid assets, such as infrastructure and private equity.
To “shift the focus” from cost to long-term value, the report also recommended “proactive communication” by DWP and the pension regulator to encourage DC plan makers (including trustees) and consultants to “actively” consider increasing their allocations to illiquid funds. assets.
Investment experts said the report’s focus on the impact of the fee cap, which was introduced by the DWP, was a red herring.
“Pension plans would like to invest more in illiquid assets, but there are still considerable practical hurdles that government and regulators still need to overcome,” said Laura Myers, partner and head of the DC practice at LCP, the actuarial consultants.
“Some plans have been marked by the experience of seeing real estate funds ‘locked in’, leaving members unable to access their savings. “
The Alternative Investment Management Association (AIMA), which is a member of the task force, welcomed the report, which also included a series of recommendations to address concerns about increasing plan investments in less liquid assets.
“This report is an important step forward for UK investors looking to protect their retirement,” AIMA said.