The DWP is biding its time in introducing changes to the charge cap to facilitate investment in illiquid assets but it has offered fresh proposals for further disclosure on how DC schemes invest.
The DWP has today published a combined consultation split into four areas relating to defined contribution (DC) and hybrid schemes. It has published responses to the consultations on facilitating investment in illiquid assets and on charge cap reform, its response to the call for evidence on the future of the DC market (consolidation) as well as two new areas of consultation on ‘disclose and explain’ illiquid investment proposals and draft ‘employer-related investment’ regulations.
The consultation, running until 11 May 2022, is motivated by the aim of improving the accessibility to illiquid assets for DC schemes with a view to generating better long-term returns for members. It includes a response to the charge cap consultation, which was exploring how to exclude performance fees from the 0.75% cap on charges in default arrangements. However, the DWP acknowledges a “mixed reaction” to its earlier proposals, with some respondents unconvinced that the proposals would incentivise schemes to change their current approach and others concerned that it might dilute the protection to members afforded by the cap.
As a result, the DWP is going to “take time to fully understand all the concerns raised, engage further, and to explore how these concerns might be addressed in the design of the policy as [it pursues] this further”. While the DWP engages again with stakeholders and formulates the proposals that will help it decide whether to pursue reform, it intends to consult on principle-based draft guidance alongside draft regulations, suggesting that changes remain likely.
The DWP is proposing new ‘disclose and explain’ requirements, which will result in DC schemes (or hybrid schemes in relation to their DC assets) needing to disclose their illiquid investments in their Statement of Investment Principles. The DWP would like trustees to describe the average percentage holding and type of illiquid assets in their default asset allocation and to state the benefits this brings to members.
Large (£100m+) schemes will also have to disclose the current asset classes to members through the Chair’s Statement with the proposal being for trustees to provide an average allocation. For hybrid schemes the £100m threshold will be determined by total scheme assets, not just the DC section.
There will also be amendments to the definition of an employer-related investment for large authorised Master Trusts (those with 500+ employers), intended to ensure that restrictions will only apply in relation to investment in the scheme funder or the scheme strategist (or a person who is connected or associated with them).
The DWP’s view is that the smaller the number of employers, the greater the risk that a single employer would have an influence over the investment approach and that 500 employers is the level at which the risk dissipates to a negligible level. Data held by The Pensions Regulator (TPR) indicates there are currently 13 Master Trusts of this scale.
The Government describes the recent call for evidence as fruitful and expresses faith that existing measures are driving consolidation where it is most beneficial. As a result, it will not be introducing any new regulatory requirements in 2022 and will focus on working with TPR to monitor value for money assessments produced this year.
