What changes to the pensions charge cap mean for you

The government could raise the pensions charge cap – the amount you can be charged in your workplace's default pension fund. Saloni Sardana explains why, and what it means for you.

With markets rattled after Friday’s mini-Budget, you may not have noticed chancellor Kwasi Kwarteng’s move to raise the pensions charge cap.

What is the pensions charge cap?

The pensions charge cap – currently 0.75% – is set by the government and is a limit on how much savers into defined-contribution (DC) pensions can be charged in their scheme’s default funds. 

Most workers’ contributions are invested in their scheme’s default fund if they don’t choose an alternative. 

The charge cap can limit where pension funds invest, meaning that fund managers cannot access high risk investments, such as infrastructure and renewable energy projects or other illiquid assets, due to high fees.

These higher risk investments often – but not always – come with higher returns. But they do tend to charge higher fees. The current cost of workplace pension schemes typically is much cheaper than the cap, generally around 0.4% to 0.5%. 

Becky O’Connor, head of savings and pensions at Interactive Investor, says so far the pensions charge cap has been a “blocker to private investment by pension funds in big infrastructure projects, because investment managers haven’t been able to deliver them and also keep charges for workplace savers under the 0.75% cap.” 

So how did the pensions charge cap change in the Kwarteng’s mini-Budget?

Kwarteng said he would “accelerate reforms” so the cap “will no longer apply to well-designed performance fees. This will unlock pension fund investment into UK assets and innovative, high growth businesses.” He did not elaborate on how a well-designed performance fee might look

The government launched a consultation in March about encouraging greater investment by DC schemes in illiquid assets. “It included amendments to the statement of investment principles that would oblige DC schemes with more than £100m in assets to explain their policies on illiquid investments,” says pensions publication Pensions Expert. 

What do the changes mean for your pension?

Raising the pensions charge cap will allow pension fund managers to move your pension savings into higher-risk investments – but at a higher cost.

Most market watchers were unconvinced.

“Changes to the charge cap to promote investment in productive finance are a red herring,” said Darren Philp, managing director at Shula PR and Policy. “I’d be surprised if this would make even a marginal difference. Pension schemes will only invest if it’s the right thing to do for their members, and tinkering around the edges won’t move the dial.” 

Helen Morrissey, senior pension and retirement analyst at Hargreaves Lansdown, echoed the view. 

“While the cap was brought in to ensure people got good value from their pension scheme, cost is not the only way of determining value.  However, the key to success will be striking the balance of delivering opportunities people want to invest in at a sensible cost and the definition of “well-designed performance fees” will be very important,” she said. 

But Tim Middleton, director of policy and external affairs at the Pensions Management Institute, took a more mixed view, saying it is a “pragmatic” step which may pave the way to make illiquid investment more attractive for DC schemes. 

But he warned that trustees’ responsibilities to members should not be overlooked and stressed that trustees’ priority is to “identify appropriate investment opportunities for members rather than to support specific sectors of the economy”.

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