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Chancellor Kwasi Kwarteng has pledged to free up billions of pounds in pension schemes in innovative British companies by reforming the 0.75 percent tax ceiling.
The cap limits how much pension providers can charge people who are automatically enrolled in their employer’s “standard” fund.
This is where most employees keep their retirement savings unless they actively choose other investments within their plan.
The government has previously discussed easing cap rules to allow for higher performance fees, which are typically levied on illiquid and higher-risk but potentially higher-return investments, such as infrastructure and sustainable projects.
Pension costs: Cabinet wants to encourage pension schemes to invest in more innovative companies by relaxing rules on what they can charge savers
Kwarteng’s new growth plan confirms it will go ahead with this plan, ‘by giving defined contribution plans the clarity and flexibility to invest in the UK’s most innovative companies and productive assets, creating opportunities to grow a higher return for savers.
‘Well-designed’ performance fees are removed from the ceiling, says the cabinet.
Kwarteng will also provide up to £500 million to support new funds that will enable pension schemes to put savers’ money into pioneering UK science and technology companies.
According to the government, the Long-Term Investment for Technology & Science (LIFTS) competition will generate billions of pounds of additional investment in UK companies over time.
Meanwhile, Kwarteng announced plans to increase the “generosity and availability” of the Seed Enterprise Investment Scheme (SEIS), hinting at expanding Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) in the future.
These are schemes that offer significant tax credits for investments in niche, privately held or AIM-listed companies on the riskier end of the spectrum, and are mostly used by high net worth and sophisticated investors.
What do pension experts say?
“The mini-budget confirmed that the cap on occupational pensions is being eased to allow schemes to expand their investment in illiquid assets as part of the government’s growth agenda,” said Steven Cameron, Aegon director of pensions.
The government is determined to unleash the ‘superpower’ of occupational pensions and invest more in less liquid assets over the longer term.
“Such investments can provide higher returns, but may also incur higher costs and some are subject to performance fees that are not known in advance.
“Faced with unpredictable performance fees, schemes fear that such investments could result in charges that would exceed the 0.75 percent cap for standard workplace auto-enrollment funds.”
Cameron says a small increase in expenses in exchange for a larger increase in investment returns could increase people’s pension pot, but the potential investment benefits will have to be explained to them.
Helen Morrissey, senior pensions and pensions analyst at Hargreaves Lansdown, said: ‘The debate has been raging for years about how UK pensions can invest in more illiquid assets, such as infrastructure, in the same way as foreign pension schemes.
There is no reason to believe that paying higher fees to fund managers will lead to better performance
Bob Campion, Charles Stanley
“Cost was a major barrier to this and any step to revise the rate cap, as outlined today, would be a real step forward.
“While the cap was put in place to ensure people get good value from their retirement plans, cost isn’t the only way to determine value.
“However, the key to success will be the balance between providing opportunities that people are willing to invest in at a reasonable price, and the definition of ‘well-designed performance fees’ will be very important.”
Callum Stewart, Head of Available Contribution Investments at Hymans Robertson, said: “We recognize that increased investment in illiquid asset investments through DC schemes can make a big difference to society given their potential to contribute to projects such as renewable energy.
‘If we can also use this to involve participants in their retirement savings – because they can physically see what their money is doing – we may also be able to encourage them to contribute more to their retirement savings.
‘This will contribute to an improvement in the overall long-term results.
“However, we remain concerned that at a time of further concern for many, comments about the charging limit are merely obscuring the concerns of many.
‘Within the sector, we fear that many will be the first to cut pension savings, causing an increasing number of retirees and future retirees to fall into 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 committed limit contributors lead to better outcomes for them.
“There is no reason to believe that paying higher fees to fund managers will lead to better performance. Chancellor Kwasi Kwarteng should not be looking to DC members for the ‘new sources of capital investment’ he believes are needed.”
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