The government will lay regulations to remove fees from the defined contribution charge cap early next year, one of a number of pensions-related proposals included in the reforms aimed at improving the competitiveness of the UK’s financial services sector.
The so-called “Edinburgh reforms” also include plans to consult early in 2023 on issuing new guidance for the pooling of Local Government Pension Scheme assets, as well as a commitment to speed up the consolidation of DC schemes, which will involve a consultation on a new value for money framework.
Proposals that may also affect schemes include the government’s plan to publish an updated green finance strategy early next year.
It will also consult in the first quarter of 2023 on bringing environmental, social and governance ratings providers within the regulatory perimeter.
The government will also consult on requiring LGPS funds to ensure they are considering investment opportunities in illiquid assets such as venture and growth capital
Jeremy Hunt, chancellor of the exchequer
A new value for money framework
The government has long sought to channel pension assets towards domestic initiatives, including infrastructure, science and technology, as well as aiding the country to meet its climate targets.
In March, it launched a consultation focused on encouraging DC schemes to invest in illiquid assets.
The government included amendments to the statement of investment principles that would oblige DC schemes with more than £100mn in assets to explain their policies on illiquid investments.
In September’s ill-fated “mini” Budget, former chancellor of the exchequer Kwasi Kwarteng announced that performance fees would be removed from the charge cap applied to DC schemes.
On December 9, Kwarteng’s successor, Jeremy Hunt, said that the government “has consulted on reforms to remove well-designed performance fees from the pensions regulatory charge cap and will lay regulations early in the new year”.
“This will provide clarity for industry and ensure pension savers can benefit from investing in UK innovation,” he continued.
Hunt also pledged a consultation led by the Department for Work and Pensions at the start of 2023 on a new value for money framework, which will be conducted alongside the Pensions Regulator and the Financial Conduct Authority.
The consultation “will set required metrics and standards in key areas such as investment performance, cost and charges, and quality of service”, he said.
The proliferation of “small pots” is a source of concern for the government and the pensions industry, with members losing track of their pots and providers incurring the cost of maintaining them. A 2018 Pensions Policy Institute study revealed that there were more than £19bn of savings in lost pots.
The government “is committed to accelerating the pace of consolidation so that no pension savers are left in poorly governed and underperforming schemes”, Hunt said.
“The charge cap was brought in to ensure people got good value from their pension scheme, but cost is not the only way of determining value and this legislation will open the doors to DC savers to invest more widely and potentially boost returns,” Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey said.
“However, the key to success of this reform will be striking the balance of delivering opportunities people want to invest in at a sensible cost.”
‘A diversified investment strategy’
The government has also made attempts to make use of defined benefit funds. LGPS funds were asked earlier this year to set out plans for investing up to 5 per cent of their assets in domestic initiatives.
Early next year, the government will consult on new guidance for the pooling of English and Welsh LGPS assets.
“The government will also consult on requiring LGPS funds to ensure they are considering investment opportunities in illiquid assets such as venture and growth capital, as part of a diversified investment strategy,” Hunt said.
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An updated green finance strategy is due in early 2023, while the government will consult on bringing ESG ratings providers within the regulatory perimeter as part of its bid to ensure that financial services play “a major role in the delivery of the UK’s net zero target”.
“Given the proliferation of firms offering ratings on ESG factors, and the different methodologies behind these ratings, it is welcoming to see the government look at benefits of bringing them into the regulatory regime,” Quilter Cheviot head of responsible investment Gemma Woodward said.
“There is an increasing dependency on data and metrics produced by these firms from asset managers and owners in order to meet regulatory reporting requirements such as [the Task Force on Climate-related Financial Disclosures], as well as using these within their responsible investment approaches, such as integrating ESG factors within the investment process.”
This article previously incorrectly stated that the charge cap was being removed, and has been amended to reflect that fees are being removed from the charge cap instead
