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DWP consults on fresh illiquid asset requirements for DC pension schemes

The UK government has published updated proposals on the disclosure by relevant defined contribution (DC) pension schemes of illiquid assets and on the exemption of performance-based fees from the DC default fund charge cap. 

The Department for Work and Pensions (DWP) published its consultation on “broadening the investment opportunities of defined contribution pension schemes”, which included its response an earlier consultation on investment in illiquid assets published in March 2022. It also published draft Occupational Pension Schemes Regulations (8 pages / 211KB PDF) and draft statutory guidance.

In its March 2022 consultation paper, the Department for Work and Pensions (DWP) proposed requirements for relevant DC schemes to disclose and explain their policies on illiquid investment in their systematic investment plans (SIPs). The DWP said “illiquid assets” will be defined as “assets which cannot easily or quickly be sold or exchanged for cash and, where assets are invested in a collective investment scheme, includes any such assets held by the collective investment scheme”.  

The DWP also set out plans to require relevant DC schemes with assets over £100 million to disclose and explain their default asset class allocation in their annual chair’s statement. But in its response, the DWP confirmed that it will implement those proposals – without the £100m threshold. The new illiquid investment policy disclosures will need to be added to the first default SIP published after 1 October 2023 and at the latest by 1 October 2024.

In our response to the consultation, we highlighted that the level of detail required from trustees in their illiquid asset disclosures seemed unnecessary – and increased the risk of members bringing a claim against the trustees

Carolyn Saunders of Pinsent Masons said: “The new asset allocation disclosure requirement will apply to the chair’s statement for the first scheme year that ends after 1 October 2023. Trustees will need to look through multi-asset investments to underlying investments, so that all illiquid exposures are clearly covered in disclosures and all schemes calculate their asset allocations at asset-level rather than fund-level.”

Saunders also welcomed the government’s decision to amend proposals for illiquid asset disclosures. “It is good to see that the DWP has listened to respondents’ concerns over proposed requirements. In our response to the consultation, we highlighted that the level of detail required from trustees in their disclosures seemed unnecessary – and increased the risk of members bringing a claim against the trustees,” Saunders said.

In the March 2022 consultation, the DWP proposed requirements for trustees to disclose what factors they consider when deciding whether to invest in illiquid assets, as well as any current barriers – or future plans – to invest in such assets. Now ministers have acknowledged that the proposals were “too burdensome or prescriptive for trustees to adhere to” and have put forward a “slimmed down” version.

Trustees will now only be required to use the highest level of granularity in asset allocations disclosures, although more detailed explanations and suggestions have been included in the draft statutory guidance.

Meanwhile, the DWP has decided to implement its proposals to add performance-related fees to the list of charges exempt from the charge cap limit of 0.75% that applies to the default funds of relevant DC schemes. First set out in a consultation in November 2021, the proposals are intended to remove barriers that might prevent trustees of DC schemes from considering investment in illiquid assets.

Cameron McCulloch of Pinsent Masons said: “The draft regulations apply the exemption to ‘specified performance-based fees’ and are expected to come into force on 6 April 2023. Trustees of schemes in scope will need to calculate and disclose in the annual chair’s statement – and publish on a website – any performance-based fee charges members incur.”

“The new definition of a ‘specified performance-based fee’ will relate to a fee paid when returns from investment exceed a specific benchmark – commonly a hurdle rate – or a specific amount. The specific amount, typically applied using a high-water mark or other mechanism, can be variable or fixed, but must be agreed between the trustees and the fund manager prior to investing,” McCulloch added.

According to the DWP, trustees must have agreed the time period over which any performance-based fee will be measured and paid with their fund manager. Trustees and the fund manager must also have agreed methods to mitigate the risk that the amount of the fee is increased as a result of short-term fluctuations in performance or valuations of the investment.

The DWP said that these requirements would prevent scheme members from receiving money for outperformance but then not being reimbursed in the instance of poor performance. It said that the current smoothing measure in the 2021 occupational pension schemes regulations will only apply up to the date that is five years after the end of the first charges year in which the trustees first chose to calculate the charge using that method.

The DWP’s latest consultation will close on 10 November 2022. 

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