UK ministers ‘pandering’ to asset managers over pension reforms

Ministers are “pandering” to asset managers with reforms that will help the UK economy recover from Covid-19 but increase charges for millions of workplace pension savers, according to a former regulator.

The government wants to loosen a 0.75 per cent cap on annual management charges to enable defined contribution pension schemes to invest more widely in so-called illiquid asset classes, typically private equity and venture capital firms, in a bid to stimulate the economy.

These asset classes in turn invest in unlisted businesses such as innovative British companies. Unlike managers of stocks and shares, they often charge hefty performance fees.

But Andrew Warwick-Thompson, formerly the Pensions Regulator’s executive director for regulatory policy, told the Financial Times that the government should put pressure on managers to change their fee structures rather than relax the fee cap.

DC schemes, which manage tens of billions of pounds of members’ retirement cash, have up until now shied away from investing in these asset classes because doing so could put schemes at risk of breaching the 0.75 per cent charge cap.

The government proposals will give DC schemes, which do not guarantee pension income, more flexibility to invest in illiquid assets by allowing trustees to smooth performance fees over a five-year period, reducing the risk of breaching the charge cap in any one year.

Warwick-Thompson, one of the most prominent people to speak out against the proposals, said it was wrong to relax charge limits, and so protections for scheme members.

“Asset managers should be changing their fees structure to fit the charge cap, and not the other way around,” said Warwick-Thompson, who was responsible for the formulation of regulatory and governance policies for UK pension schemes in the private and public sectors from 2013-17.

“The government is pandering to the asset management industry.”

Warwick-Thompson, who is now a professional trustee with Capital Cranfield, a firm that provides trustee services to pension schemes, said it was “not necessary to change the charge cap in a way that will see members paying more”.

Warwick-Thompson’s intervention comes as big UK pension schemes express reservations about the government push to get them investing in assets to boost the nation’s recovery.

“We’re supportive of the principle of incorporating illiquid assets in pension funds given the potential to help with the economic recovery and in building a greener economy,” said Tim Orton, managing director for investment solutions at Aegon, a provider which manages about £6bn in workplace pension funds.

“However, there are practical considerations which make this challenging. It’s customers’ savings that are being invested so we’d need to ensure that any additional costs were compensated for with additional returns and that we could explain the benefits of the investments to customers.”

The Department for Work and Pensions, which is consulting on changes to the workplace pension charge cap, said fund managers and pension schemes needed to work together to find solutions that delivered access to such opportunities at an affordable price and appropriate risk to members. 

“We do not seek to direct investment in any way,” the DWP said.

“We know many defined contribution schemes are looking to access a more diverse portfolio of assets, including illiquid assets, and our policy is that trustees of these schemes should be at liberty to consider what investments are best for their members.”

The Investment Association, which represents asset managers, said fee competition was “fierce” in the DC pension market.

“This is a market of professional buyers who do not want to see their members pay high fees for the sake of it. They will invest at a given fee level and structure only if they see it as adding value to members,” it said.

The consultation is now closed and the government is considering the responses. Ministers are hoping to introduce the new rules by October.