UK Retirement Schemes Should Shift their Focus from Low Charges

01 October, 2021 by Denzil Otieno 4 mins read Category:  Money Personal Finance

The UK Treasury, the Bank of England, and regulators have recommended the pension industry to shift from keeping savers’ costs low to the nation’s post-covid recovery. 

In a report released on Monday—a working group led by the Bank of England—the Treasury and the Financial Conduct Authority stated that the industry’s “excessive” focus on low charges had resulted in investments in long-term assets, which typically impose higher costs, being “overlooked.”

The Productive Finance Working Group was established in 2020 to redirect more of the  £500bn in assets underpinned by thousands of defined contributions (DC) pension systems to investments perceived as integral to the prosperity of the UK economy and potentially beneficial to the investors. 

The Productive Finance Working Group Report 

The working group reported that a 0.75%, initiated by the Department for Work and Pension in 2015 to safeguard workplace retirement savers from “improper” fees, could be undermining schemes from investing in long-term assets.

Since the implementation of the automatic enrolment, several million low and middle-income workers have been enrolled in pension saving for the first time, and, against a historical backdrop of high charges, the cap has attracted fee competition, resulting in lower expenses for members.

Many feel that there is an excessive focus on cost in the industry instead of long-term value. The group’s working is confident that it’s essential to focus on the long-term benefit for members and promote products that will allow plans to access various investments, potentially opening many opportunities to improve member results in retirement. 

Furthermore, the research stated that most DC schemes that did not provide a guaranteed pot were sceptical of the values, requirements, and complexity of performance fees commonly charged by private equity and venture capital operators. These organizations often handle long-term assets in which the government wants to encourage investment.

The study, however, did not recommend that these performance fees, which are paid when a manager exceeds a predetermined target, be reformed. Instead, it noted that asset managers and DC schemes should collaborate to develop acceptable procedures to allow performance fees while staying under the charge ceiling.

The research further affirmed that as schemes continue to consolidate, DWP should explore how to reconcile performance fees with the objective of the charge cap and trustees’ capacity to invest in a diverse range of assets, including less liquid ones, in the future.

Another Survey Finds Out Reluctance to Invest 

The Financial Times conducted a poll of 22 DC schemes and asset managers. This month, the widespread reluctance to engage in so-called illiquid assets such as infrastructure and private equity.

The study also advised “proactive communication” by DWP and the Pensions Regulator to encourage DC plan decision-makers, including trustees, and consultants to actively explore raising their allocations to illiquid assets to shift the focus from cost to long-term value.

According to investment experts, the report’s emphasis on the impact of the DWP’s charge ceiling was a red herring.

Laura Myers, a partner and head of the DC Practice at LCP, the actuarial consultants’ Pension, stated that while plans would want to invest more in illiquid assets, significant practical hurdles remain that the government and regulators have yet to overcome.

She went on to say that some plans have been tainted by the experience of having property money ‘gated,’ leaving members unable to access their investments.

The Alternative Involvement Management Association (AIMA), a working group member, welcomed the study, containing several proposals to address concerns about schemes’ growing investment in less liquid assets.

According to AIMA, this study is a significant step forward for UK investors wanting to protect their retirement.

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