16 April 2019

The government is driving an initiative to facilitate greater investment by occupational pension schemes in illiquid investments such as infrastructure projects.

In the consultation, the DWP have used the term 'illiquid investment' to include assets which are traded off-exchange or are otherwise less readily tradeable. In any new regulations, they propose to offer a broad definition to permit some flexibility in interpretation.

DC additional voluntary contributions held by DB schemes are out of scope. Defined benefits are generally excluded as well, although the DWP is considering including schemes which provide more than one type of benefit if their DC benefits exceed a certain threshold.

The consultations proposals are divided into a number of main headings:

Reporting illiquid investments

There would be a requirement on larger DC schemes to report to members a statement of the extent to which trustees have considered illiquid investments in their investment strategies.

The statement might be included in the Statement of Investment Principles and then annually in the Implementation Statement.

To avoid generic statements, trustees would be required to include quantitative data, although the level of granularity between (for example) types of assets might vary and would be shown as approximate values.

Encouraging consolidation

The consultation asks whether the government should encourage or nudge small DC schemes to consolidate.

One option might be to include an assessment of whether a transfer to another scheme would be in members’ interests in the Chair’s Statement of larger schemes. It suggests an assessment every three years because a higher frequency is likely to be disproportionate.

The consultation also asks for views on whether schemes should be selected to explain why they do not consolidate in groups based on certain factors, such as size of membership or status of the members.

Default fund charge cap

The DWP want to explore an extension to ways in which charge cap compliance is measured to make it easier for them to make investments which levy performance fees, but without reducing member protection.

They ask to what extent illiquid investment funds have performance fees and whether market practices are changing. It also questions whether compliance is a barrier to accessing funds which charge a performance fee or contain certain asset classes.

Updated charge cap guidance

The consultation also provides non-statutory guidance on the scope of the charge cap. 

The paper clarifies that investment trusts, unit—linked insurance contracts, Non-UCITS Retail Schemes and Qualifying Investor Schemes are all in scope of the charge cap.

In addition, it adds to the list of exclusions costs incurred by investee firms which have a general commercial or industrial purpose and which can therefore be excluded from the charge cap.

Costs which are wholly offset against on-going management fees do not need to be considered; otherwise they would be double-counted.

Finally, research costs, fund entry and exit costs are intended to be treated as transaction costs which are intended to be subject to the cap.

The consultation ran until 1 April 2019 and invited comments as to whether the updated list provides more clarity and whether any further clarity might be required. We now await feedback and final proposals.

For advice and further information, please get in touch with your usual Burges Salmon contact.

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions Practice
  • Pensions Services
  • Pensions Legal Advice

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