Planned reforms to UK pensions will open access to PE

Mooted removal of performance fees from the charge cap applied to direct contribution pensions will open up PE and VC to retail investors.

Defined contribution schemes in the UK may soon be allowed greater access to private markets following proposals from the Department for Work and Pensions.

Under the consultation, published on 6 October, the UK government plans to remove performance fees from the charge cap applied to DC schemes – which are constrained by an annual 0.75 percent charge cap on assets under management and administration. This has acted as a barrier to accessing certain asset classes that charge a performance fee, including private equity, growth equity and venture capital.

DWP noted in the consultation paper that the draft regulations are not intended to reduce the bargaining power of DC schemes to demand alternatives to performance fees. Instead, it seeks to “ensure open dialogue between the trustees and the fund manager on the appropriateness of the performance-related fee structures and their value to scheme members”.

Joanna Asfour, global head of consulting relations and managing director at Partners Group, welcomes the progress being made, noting that “removing performance fees from the charge cap will help broaden access to private markets for DC investors and result in a level playing field for all”.

She adds: “Private markets [have] direct relationships with companies and can therefore have considerable influence over driving ESG initiatives. This aligns with the long-term investment horizons and sustainability goals of UK pension schemes.”

BVCA director general Michael Moore says the moves will “offer future UK pensioners access to the strong, long-term returns generated by PE and venture capital funds and provide an important new source of capital to invest in UK businesses”.

Set to benefit

The £24 billion ($30 billion; €29 billion) National Employment Savings Trust is among the UK DC pensions that will benefit from the changes. NEST selected its private equity managers, Schroders Capital and HarbourVest Partners, early this year as part of its plans to deploy at least £1.5 billion in the asset class by early 2025. It also has a longer-term target of having around 5 percent of its portfolio invested in PE.

Along with the exemption of performance fees, DWP proposes to introduce regulations that would require DC schemes with over £100 million in AUM to publicly disclose and explain their default asset class allocation in their annual statements. The proposal also seeks to create a standardised definition of “illiquid assets” to apply to the new illiquid investment policy disclosures in the Statement of Investment Principles.

The government sought views on the draft rules and closed consultation on 10 November 2022. Draft regulations are expected to come into force in April 2023.