The DWP has today published a variety of documents under the heading: Broadening the investment opportunities of defined contribution pension schemes. These include a response to proposed ‘disclose and explain’ amendments to Statements of Investment Principles (SIPs) and a consultation on further changes to proposals to exempt performance-based fees from the charge cap. Draft regulations and statutory guidance complete the set. Together, these set out how the Government plans to encourage relevant defined contribution (DC) and collective money purchase (CMP) schemes to invest in a broader range of assets as part of a diversified portfolio.
The DWP sets out that schemes will be able to exempt performance-based fees from the charge cap where they feel it is in their members’ best interests.
The DWP proposes that schemes will be able to use an exemption to exclude “specified performance-based fees” from charge cap calculations from 6 April 2023. It believes it has tightly defined this phrase so that it relates to a fee paid when returns from investment exceed a specific rate (a hurdle rate – which may be fixed or variable) or a specific amount. The rate, or amount, and the period of time over which it is calculated must be agreed upon between the trustees and the investment manager before investing. The statutory guidance makes it clear that trustees need to take specific advice before investing and ensure that the fee structure mechanism provides “appropriate safeguards for members”. The definition does not preclude any asset classes.
As for other fees, the level of charges in each default arrangement (or, in the case of qualifying CMP schemes, the scheme as a whole) will need disclosing as a percentage of the average value of assets through the Annual Governance (Chair’s) Statement and draft statutory guidance has been published to help schemes explain how deductions operate – particularly with regard to their timing. Existing provisions relating to smoothing mechanisms are to be repealed.
The DWP has modified the planned requirements in relation to how schemes should state their policy on illiquid investment and how they disclose their asset allocations. Perhaps most significantly, they have removed the threshold of £100m, so that all relevant schemes will have to amend their default SIP and disclose the asset allocations and explain why they have or have not chosen to invest in illiquid assets.
The new asset allocation disclosures will need to be included in the Chair’s Statement for the first scheme year which ends after 1 October 2023, while the new illiquid investment policy disclosures will be required to be added to the first default SIP of relevant occupational pension schemes published after 1 October 2023. These requirements are being made through amendments to the regulations dealing with Investment and Disclosure. Draft statutory guidance sets out when trustees have to publish and contains specific definitions of asset classes to be used as well as sample tables showing how the detail may be presented.
The DWP has moved away from requiring schemes to discuss their approach to illiquid asset policy in the general SIP (except for CMP schemes), it will instead require it only in respect of the default arrangement. DWP plans to proceed with a definition of “illiquid assets” that it describes as both wider and more transparent: “assets which cannot easily or quickly be sold or exchanged for cash and, where assets are invested in a collective investment scheme, includes any such assets held by the collective investment scheme”. It believes this will be more easily understood by members.
The DWP plans to lay the regulations implementing these measures in the spring. This consultation runs to 10 November 2022.
