• Performance fees often levied by high-risk private equity and venture capital funds could be exempted from the 0.75% automatic enrolment charge cap under plans revealed by the Government today (Enabling investment in productive finance (publishing.service.gov.uk))
• Pensions minister Guy Opperman argues by giving schemes extra flexibility to invest in these funds, long-term member returns could be improved
• Keeping costs as low as possible remains vital in maximising long-term returns
Tom Selby, head of retirement policy at AJ Bell, comments: “As automatic enrolment pension schemes build scale, you’d naturally expect charges – and potentially the 0.75% charge cap – to fall.
“However, with the Treasury desperate to drive investment towards higher risk UK projects, in particular infrastructure, the DWP wants to move in the other direction by watering down the cap.
“Specifically, it has proposed exempting performance fees commonly levied by high-risk private equity and venture capital funds from the charge cap.
“This would potentially make it easier for schemes to invest in vehicles operating a traditional ‘2:20’ charging structure – where upfront fees are 2%, with the fund manager raking in 20% of any outperformance above a certain agreed level. It’s important to note the 2% element of such a charging structure would continue to be included in the charge cap under the plans.
“While allowing performance fees might increase the investment options open to automatic enrolment schemes, trustees will still need to put the needs of members front-and-centre. After all, it is their money that is being invested here.
“There is no guarantee that fund managers operating a performance fee structure will deliver better returns than a lower cost fund. It will also be crucial for any scheme considering such investments to ensure the performance fee incentives are aligned with the long-term interests of their members.
“There is a reasonable argument that funds operating a performance fee structure should consider reducing charges when they fail to deliver returns. There is, of course, nothing stopping schemes attempting to negotiate such terms with a fund manager – although whether such negotiations would bear fruit is another question entirely.”
