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Pension trustees given scope for private market investment through UK proposals

Out-Law News | 06 Apr 2022 | 4:09 pm | 2 min. read

The UK government has published draft regulations which, if passed, could make it easier for defined contribution (DC) pension schemes to invest in illiquid assets if this is in members’ interests.

Under the proposals outlined last week, the government will amend Statement of Investment Principles requirements to ensure that relevant DC pension schemes disclose and explain their policies on investment into illiquid assets including infrastructure and private equity.

The government said it also proposed to introduce regulations that require relevant DC schemes with over £100 million in total assets to publicly disclose and explain their default asset class allocation in their annual chair’s statement.

Some master trusts already voluntarily report their asset allocation through Corporate Adviser Pensions Average data which forms part of industry publication Corporate Adviser’s ‘Master Trust and GPP Defaults Report’.

Pensions expert Tom Barton of Pinsent Masons said: “These policy proposals attempt to break down some of the systemic barriers to illiquid investment and give the opportunity for trustees to truly consider investment in private markets. This policy could help shift focus from cost to value with trustees giving more weight to the decision of whether to invest in illiquid assets.”

The government’s Department for Work and Pensions (DWP) also responded to a previous consultation on removing performance fees from the DC charge cap. It said this had received a mixed response, with the financial services sector and some master trusts welcoming the proposal, while trustee service and advisory bodies and other master trusts said the move would not be enough to incentivise DC schemes to change their current approach to investing in illiquid assets that come with performance fees.

Barton Tom

Tom Barton

Partner

This policy could help shift focus from cost to value with trustees giving more weight to the decision of whether to invest in illiquid assets

The government said it would continue to explore the removal of performance fees from the charge cap.

“Changes we propose will be intended to first and foremost ensure members are sufficiently protected. We are encouraged by the feedback we received that the policy intention we set out to only exempt ‘well-designed’ performance fees that are paid when an asset manager exceeds pre-determined performance targets is well intended,” it said.

Pensions expert Mark Baker of Pinsent Masons said: “Despite its u-turn last year looking odd at the time, it’s right that the DWP is trying to create headroom for UK DC schemes to use these funds. Time will tell how quick the take-up is, but at least we’re inching towards more certainty for schemes and fund providers.”

The consultation package also included a proposal to amend the investment regulations in relation to authorised master trusts so that employer-related investment restrictions will only apply in relation to investment in the scheme funder, the scheme strategist, or a person who is connected with or an associate of the scheme funder or the scheme strategist.

Meanwhile, the government confirmed that following its call for evidence on future consolidation in the DC market, it would not be introducing any new regulatory requirements with the sole purpose of consolidating the market in 2022.

However, the government will work closely with the Pensions Regulator (TPR) to monitor the impact of the value for members’ assessment, which will start to be produced this year. It said its focus would continue to be on creating, with TPR and the Financial Conduct Authority (FCA), a value for money framework for occupational and workplace pension schemes.

The DWP is also to create a framework for consistent, informative, member-focused value metrics that will enable comparison and encourage competition on overall value. The government said this would improve member outcomes more than targeted consolidation measures.

“The new value for money frameworks are centrally important for the DC sector, and everyone in the industry should be feeding into the consultations. It’s a hugely difficult process, particularly the aim of creating common metrics for workplace and retail. But it’s essential for the regulators to get the balance right,” Baker said.