With news of the Department for Work and Pensions’ (DWP) proposed changes to the current performance-based fees system for automatic enrolment pension schemes, Quantum Advisory questions the actual merit of the amendments.
Currently, performance-based fees are included in the pension scheme charge cap, whereas the new proposals would see these excluded from the cap supposedly providing wider opportunities for schemes to pursue longer term investments with potential greater returns.
Senior Consultant for Quantum Advisory, Robin Dargie, states that performance fee-based investments are unlikely to be used by defined contribution (DC) schemes, so in reality the latest changes by DWP would have little impact on those they are intended to support.
“For DC schemes, I see the change to exclude performance fees from the charge cap as a bit of a non-event, as the type of investments that have performance fees are unlikely to be ones that DC scheme would invest in due to liquidity concerns. Such investments tend to have higher fees already, so would tend to be offered as self-select options, rather than as part of the default. Because of this, member take-up is likely to be low or non-existent in many schemes, which, in itself, will make trustees question the wisdom of offering this type of fund.
“Of course, there are proponents of this type of fund due to the illiquidity premium, so they may very well grow in popularity.”
Jayna Bhullar, Senior Investment Consultant for Quantum Advisory, said:
“There hasn’t been much uptake in DC space for illiquid investments outside of those larger setups, which is a shame. I think there are other challenges including member understanding and engagement, as well as complexity that act as barriers.
“With these new measures, I think there should be a focus on ‘value’ in terms of performance that is delivered, when allowing for fees and not just absolute charges in isolation.”