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Push into illiquid assets exposes UK pension savers to higher fees

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The UK government will relax rules shielding tens of millions of UK retirement savers from high charges as it aims to channel billions of pounds of pension fund cash into longer-term investments such as start-ups and infrastructure.

The government on Monday confirmed plans to exempt performance fees from an annual 0.75 per cent cap on annual charges that can be levied on auto-enrolled pension savers. The cap has long been seen by the industry as a barrier for many “defined contribution” pension schemes to investing in less-liquid assets, whose managers typically charge performance-related fees.

The shift is part of a wider drive by ministers to unlock pension assets to assist with the government’s “levelling up” agenda, by encouraging schemes to diversify away from heavily-traded stocks and bonds into illiquid assets. However, critics say it opens the door for millions in pension savings to be siphoned off into hefty fees.

“This is bad news for defined contribution pension savers,” said John Ralfe, an independent pensions consultant. “The emphasis should be on simplicity and keeping costs low. This is open season for snake oil salesmen.”

During the consultation process on the reforms, concerns were raised about the impact of performance fees on members, who have no guarantee that paying higher fees will generate better returns for their retirement. Before entering into any performance fee agreements, the government expects pension trustees to seek professional advice to ensure member interests are protected.

The decision to press ahead with the changes has also raised some eyebrows given the role that illiquid pension scheme investments played in last year’s gilt market crisis, when many schemes in the defined benefit sector were forced to ditch government debt because they could not sell less-liquid assets quickly enough to meet margin calls.

James Fouracre, head of UK defined contribution at investment manager Ruffer, said the turbulence in September and October had highlighted the risks of pension funds pushing too far into hard-to-sell assets. “Schemes were forced into selling what they could rather than what they wanted to and those with the largest exposure to illiquid assets were particularly affected,” he said.

The government hopes the reform will steer more investment by private sector DC plans into green projects, property, infrastructure and start-up businesses. Venture capital and private equity — where performance fees are typical — invest in these areas.

“This is an important step in our journey to ensure DC pension schemes can take advantage of the opportunities illiquid asset classes can bring to pension scheme savers, and in helping to unlock pension fund investments in assets that can benefit the UK economy,” said Laura Trott, pensions minister. “Trustees must always make investment decisions that are in the best interests of their current and future members.”

The British Private Equity & Venture Capital Association said the reforms would provide “an important new source of capital” for UK businesses.

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