As part of the UK Government’s aim to encourage UK defined contribution (DC) pension funds to invest more in infrastructure and other illiquid assets, the Department for Work and Pensions (DWP) has published a new consultation on Enabling Investment in Productive Finance. The proposals also reflect the Government’s commitment to shift the focus of DC schemes’ investment strategies away from cost and more towards overall value, including by opening up private markets to DC savers.

The consultation sets out proposals to change the treatment of fees that are based on the investment performance of a fund’s underlying assets, so that they do not fall within the scope of the statutory cap on charges in the default funds of defined contribution (DC) pension funds used for automatic enrolment.

The charge cap covers all member-borne administration charges associated with scheme and investment administration, excluding certain costs and charges, such as transaction costs. Broadly speaking, it prevents schemes from imposing charges of more than 0.75% of a member’s fund annually. The change is designed to remove one of the structural barriers which might discourage DC schemes from investing in long-term illiquid assets by giving them the flexibility and freedom to pay performance-based fees, if they think this will be in the financial interest of members.

Removing barriers to investment

The Government is determined to remove any barriers, real or perceived, to investments in any asset classes that could bring benefits to pension savers. A key barrier that is raised consistently is the amount and unpredictability of performance fees and the difficulty of measuring these and ensuring they remain within the charge cap.

As well as removing this barrier, the Government hopes its proposals will encourage market participants to reform existing performance fee structures, taking into account the needs of DC schemes. Its aim is to create a regulatory environment that allows pension scheme trustees to invest where they think they can achieve better value for members and in a way that encourages genuine innovation and competition on fees, including on the part of investment managers.

The timing of this proposal is significant given the recent launch of the new Long-Term Asset Funds (LTAFs), which are designed to facilitate investment by UK pension funds (and other investors) in long-term, illiquid assets, such as venture capital, private equity, private debt, real estate and infrastructure.

Excluding well-designed performance

In order to achieve its policy objectives, the Government is proposing to extend the list of charges that are excluded from the charge cap to include “well-designed” performance fees that are paid when an asset manager exceeds pre-determined performance targets. All other investment administration charges currently included in the cap would remain so, including the fixed fee element of any performance fee model – such as the 2% fixed element of the traditional 2 and 20 performance fee model.

The Government is concerned that some asset managers could look to take advantage of the new exclusion by, for example, reforming existing flat fee charges to include a performance related element, which could potentially lead to members paying more for the same service. It is considering various measures to prevent this and to ensure that members are only required to pay fees when genuine outperformance is achieved. These include:

  • tightening the definition of “performance fee” contained in the Occupational Pension Schemes (Charges and Governance) Regulations 2015 (the Charges and Governance Regulations), and
  • restricting the asset classes to which the performance fee exemption would apply to assets such as venture capital, private equity, infrastructure, and/or private credit.

The Government is also considering whether to add additional criteria to the definition of performance fees currently contained in the Charges and Governance Regulations in order to ensure that its call for ‘a new approach to fees’ is met. One issue it is keen to address is the perceived imbalance in existing structures under which performance-based fees kick in on outperformance but trustees are not reimbursed if performance then drops off. While the Government is considering several options to remedy some of these concerns, it has also highlighted the need for large schemes to exert their buying power on both the level and structure of such fees.

Other design issues the Government has in its sights include:

  • the principles for typical ‘hurdle rates’ (i.e. the return threshold that must be achieved before performance fees apply) for performance fees across different asset classes
  • accrual methodologies for performance fees
  • linking performance fees directly to realised profits
  • circumstances when caps on performance-fee-incurring assets within the portfolio might be appropriate
  • incentivising the development of alternative fee methodologies such as ‘1 and 30’
  • requirements for a high-water mark, and
  • banning the practice of clawback.

The exclusion of performance related fees from the charge cap would see the removal of the smoothing mechanism for performance fees that was introduced into both the retrospective and prospective methods of assessing compliance with the charge cap on 1 October 2021. However, the Government has indicated that schemes may still be required to disclose the level of performance related fees to members in their annual chair’s statement even if they are outside the scope of the charge cap.

Next steps

The consultation closes on 18 January 2022.

If the Government decides to press ahead with its plans, it will aim to consult on draft regulations in early 2022, with a view to the amending regulations coming into force in October 2022.


The fact this consultation is taking place comes as no surprise given the Government’s drive to encourage large DC pension funds to invest more in infrastructure and other illiquid asset classes. There is no doubt that removing the need to include well-designed performance fees in the charge cap will remove a structural barrier which might otherwise discourage such investment. However, this will not remove the need for trustees to ensure that any performance fees they do incur represent good value for their members.

The consultation recognises that some large schemes are already negotiating more tailored fee structures to overcome operational issues with private equity managers and others. The Government has made clear that it does not want to undermine these negotiations or interfere with market forces. Separately, many large master trusts have already taken the view that they will not pay performance fees of any kind. The Government says that it passes no comment on this recognising that this is a commercial judgment.

Although this consultation only relates to occupational pension schemes, we presume that if these measures are enacted the same changes will be made by the FCA to the charge cap rules contained in the FCA Handbook that apply to the default funds under contract-based schemes used for automatic enrolment.

Key Contacts

Nish Dissanayake
Nish Dissanayake
Partner, Corporate, London
+44 20 7466 2365

Michael Aherne
Michael Aherne
Partner, Pensions, London
+44 20 7466 7527

Tim Smith
Tim Smith
Professional Support Consultant, London
+44 20 7466 2542









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