Chancellor Kwasi Kwarteng has promised to unlock billions of pounds of pension scheme investments into innovative UK firms by reforming the 0.75 per cent charge cap.
The cap limits how much pension providers can charge people auto-enrolled into their employer’s ‘default’ fund.
This is where most workers keep their retirement savings unless they actively choose other investments within their scheme.
The Government has previously consulted on easing the cap rules to allow higher performance fees, typically levied on illiquid and higher risk – but potentially higher return – investments such as infrastructure and sustainable projects.
Pension charges: Government wants to encourage pension schemes to invest in more innovative businesses by easing rules on what they can charge savers
Kwarteng’s new growth plan confirms it will go ahead with this plan, ‘giving defined contribution pension schemes the clarity and flexibility to invest in the UK’s most innovative businesses and productive assets creating opportunities to deliver higher returns for savers.
‘Well-designed’ performance fees will be removed from the cap, the Government says.
Kwarteng will also provide up to £500million to support new funds allowing pension schemes to put savers’ money into pioneering UK science and technology businesses.
The ‘Long-Term Investment for Technology & Science (LIFTS)’ competition will unlock billions of pounds of additional investment into UK firms over time, according to the Government.
Meanwhile, Kwarteng has announced plans to increase the ‘generosity and availability’ of the Seed Enterprise Investment Scheme (SEIS), and hinted at extending Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) in the future.
These are schemes offering substantial tax relief for investing in niche, unquoted or AIM-listed companies at the riskier end of the spectrum, and tend to be used by wealthy and sophisticated investors.
What do pension experts say?
‘The mini Budget confirmed the charge cap for workplace pensions is to be relaxed to allow schemes to extend their investments into illiquid assets as part of the Government’s growth agenda,’ says Steven Cameron, pensions director at Aegon.
‘The Government is determined to unleash the investment “super power” of workplace pensions and increase investments in longer term less liquid assets.
‘Such investments can deliver higher returns but they can also have higher charges and some are subject to performance fees which can’t be known in advance.
‘Faced with unpredictable performance fees, schemes have feared such investments could lead to charges breaching the 0.75 per cent cap for automatic enrolment workplace pension default funds.’
Cameron says a small increase in charges in return for a bigger increase in investment returns could boost people’s pension pots, but the potential investment benefits will have to be explained to them.
Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown, says: ‘The debate has raged for many years on how UK pensions can invest in more illiquid assets such as infrastructure in the same way overseas pension schemes have.
There is no reason to believe that paying fund managers higher fees leads to better performance
Bob Campion, Charles Stanley
‘Cost has been one major barrier to this and any moves to review the charge cap as outlined today would be a real step forward.
‘While the cap was brought in to ensure people got good value from their pension scheme cost is not the only way of determining value.
‘However, the key to success will be striking the balance of delivering opportunities people want to invest in at a sensible cost and the definition of “well-designed performance fees” will be very important.’
Callum Stewart, head of defined contribution investment at Hymans Robertson, says: ‘We acknowledge that more investment in illiquid assets investment by DC schemes could make a big difference in society given their potential to contribute to projects such as renewable energy.
‘If we can also use this as a way to engage members in their pension savings – because they can physically see the good their money is doing – we can also potentially encourage them to contribute more to their pension savings.
‘This will add to an improvement in overall long term outcomes.
‘However we remain concerned that at a time of further worry for many, comments around charge cap are merely covering up the worries of many.
‘Within the industry, we are afraid that pensions savings will be the first thing to be cut for many, leading to an ever increasing number of pensioners and future pensioners heading into pensioner poverty.’
Bob Campion, senior portfolio manager at Charles Stanley Fiduciary Management, says: ‘While performance fees can help align the interests of fund managers and their clients, it would be a heroic assumption to think that excluding performance fees from a cap for defined contribution members will lead to better outcomes for them.
‘There is no reason to believe that paying fund managers higher fees leads to better performance. Chancellor Kwasi Kwarteng should not be looking to DC members for the “new sources of capital investment” that he believes are required.’