Enabling occupational schemes to take advantage of long-term illiquid investment is one of the government’s key priorities. To achieve this, along side the FCA and the Pensions Regulator (TPR), they have implemented legislation, regulations and statutory guidance and faciliated a Productive Finance Working Group. More details on all of this can be found below.
At every opportunity, RE:UK (and previously AREF) makes representation to the UK Government on ways to unlock productive investment for DC pension schemes.
UK Government - Pensions Investment Review
Find out more here about the Government's Pensions Investment Review including proposals to enable DC pension schemes and Local Government Pension Schemes (LGPS) to invest more in prouctive assets.
Value for Money Framework
FCA - Value for Money Framework
On 8 January 2026 the FCA published CP26/1 The Value for Money Framework; this was a response to CP24/16: The Value for Money Framework and included a further consultation and discussion paper. In August 2024.,the FCA published CP24/16 The Value for Money Framework which contained proposals for detailed rules and guidance for a new value for money (VFM) framework for savers invested in default arrangements of workplace defined contribution (DC) pension schemes. These proposes included:
- requirements for the consistent measurement and public disclosure of investment performance, costs and service quality by firms for default arrangements of workplace DC pension schemes against metrics the FCA believe allow VFM to be assessed effectively
- the ability for those overseeing and challenging an arrangement’s value – Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) for contract-based schemes – to assess performance against other arrangements and requires them to do so on a consistent and objective basis
- requirements for public disclosure of assessment outcomes including a 'red, amber, green' (RAG) VFM rating for each arrangement and
- requirements for firms to take specified actions where an arrangement has been assessed as not VFM (red or amber).
While this consultation relates to rules for FCA-regulated firms operating contract-based pensions, they are based on previous work with the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR) (see below) and are designed to be suitable for application across the DC workplace pensions market.
AREF's responses to both of the consultations focussed on investment by pension schemes in real estate assets. These responses can be requested from RE:UK.
DWP/FCA/TPR - Value for Money: A framework on metrics, standards, and disclosures
In July 2023, the Government published a number of papers in relation to providing better outcomes for pension savers. One of these was the response to the policy consultation on Value for Money: A framework on metrics, standards and disclosures, which was published in January 2023. The consultation and response were jointly published by the Department for Work and Pensions (DWP), Financial Conduct Authority (FCA) and the Pensions Regulator (TPR).
The Government and regulators proposed key metrics, standards and data disclosures for DC pension schemes under the Value for Money (VFM) framework. They also included proposals for the use of this data in comparisons and assessments of value for money.
The VFM framework will be implemented in phases and the Government and regulators will continue to work with industry to ensure that schemes, providers, and employers are as prepared as possible. It will take time to fully implement the VFM framework; primary legislation will be required and there will be further consultations on draft regulations and FCA rules.
AREF's response to the consultation can be requested from RE:UK. AREF agreed with Government that delivering value for money doesn’t just mean low costs and charges.
TPR - New 'Private markets investment' guidance
On 24 January 2024, the TPR published new guidance on Private markets investment to help pension scheme trustees consider better outcomes for savers by investing in private market assets, including real estate. This guidance may also be of interest to the LGPSs and advisors. The guidance includes specific matters to be considered by DB pension schemes and DC pension schemes, including value for money. Also, there is a section within the guidance on performance fees.
The guidance refers to the Pensions and Lifetime Savings Association's (PLSA's) report Pension Scheme Investment in Illiquid Assets - Case Studies from the Pension Sector.
DWP - Extending Opportunities for Collective Defined Contribution Pension Schemes
On 11July 2023 the Department for Work and Pensions (DWP) published the Government's response to the consultation on Extending Opportunities for Collective Defined Contribution (CDC) Pension Schemes. The response sets out the Government's proposed way forward; this will be realised through secondary legislation which will be published in draft form later in 2023.
The original consultation was published in 2023. This sought views on policy proposals for:
- broadening CDC provision beyond single or connected employer schemes to accommodate multi-employer schemes
- the role of CDC in decumulation
AREF's response can be requested from RE:UK.
Productive Finance Working Group
The Productive Finance Working Group was convened by HM Treasury, the Bank of England and the FCA in November 2020, to develop practical solutions to the barriers to investment in long-term, less liquid assets. The Working Group membership comprised a broad range of industry participants, including pension schemes, investment consultants, asset managers, pension scheme trustees, investment platforms, a law firm, and trade associations. These have included The Investment Association (IA), who have represented AREF’s interests, and some AREF Fund Members.
One of the first actions by the Working Group members, with the broader industry and official sectors, was to publish in September 2021 A Roadmap for Increasing Productive Finance Investment. This report sets out the Working Group’s findings and recommendations:
- Section 2 outlines the case for investment in less liquid assets and evidence of low levels of such investment by UK DC schemes;
- Sections 3-6 consider the key barriers to DC schemes’ investment in such assets, and sets out proposed solutions. These have been grouped them into four categories:
- shifting the focus from cost to value for DC pension scheme members;
- building scale in the DC market;
- adopting a new approach to liquidity management;
- and widening access to less liquid investment, including to retail investors.
There are several vehicles that can facilitate investment in long-term, less liquid assets, including investment trusts, qualified investor schemes (QIS), European Long-Term Investment Funds (ELTIF) and others. A high priority and early deliverable for the Group was to facilitate the successful rollout of the Long-Term Asset Fund (LTAF) structure.
The Productive Finance Working Group published a series of guides to assist DC decision makers such as pension trustees, and their advisers, who may be considering making allocations to private market investments. In addition, a model OEIC instrument of incorporation for LTAFs was published. Both the guides and the model instrument are available on the IA’s productive finance webpage.
We hope these guides will prove useful to firms who are engaging with potential clients, particularly DC pension trustees and their advisers.
Although, the Working Group’s focus was mainly on the barriers faced by DC pension schemes to invest in long-term, less liquid assets, consideration was also given to distribution to a broader range of investors, including retail.
More details on the Productive Finance Working Group can be found on the Bank of England website. It is understood that the Productive Finance Working Group was wound up in the summer of 2023.
DWP - Broadening the investment opportunities of DC pension schemes
On 30 January 2023 the government published their response to chapters 2 and 3 of the paper on Broadening the investment opportunities of DC pension schemes. AREF's response to the consultation, which had been published in October 2022 by the Department for Work and Pensions (DWP), can be requested from RE:UK.
The Government's aim is for DC pension schemes to consider the value of investing in illiquid investments and in doing so unlocking pension fund investments in assets that can benefit the UK economy.
‘Disclose and Explain’ policies on illiquid investment
In chapter 2 of the October 2022 paper, the government provided their response to the views they received regarding the Disclose and Explain Policy Proposals in Facilitating Investment in illiquid assets by DC pension schemes published in March 2022. They consulted on draft regulations and guidance to achieve the policy intent. The Government received broad support for the regulations and guidance as set out. In their response in January 2023, they provided details of a few changes they had made to strengthen the regulations and guidance as suggested by respondents to the consultation.
The requirement for DC pension schemes to disclose and explain their policies on illiquid investment as well as their full asset allocations are expected to take effect from 1 October 2023..
‘Exempting performance-based fees from the regulatory charge cap’ - Draft regulations and statutory guidance
In chapter 3 of the paper published in October 2022, the government sought views on draft regulations and guidance on the exemption of performance-based fees from the regulatory charge cap proposals. These were designed to stimulate illiquid investment by occupational DC pension schemes. The policy proposals were first outlined in their November 2021 consultation Enabling investment in productive finance and have been developed further following the feedback the government received to that consultation and further follow-up engagement with a range of industry stakeholders.
After considering the response to the draft regulations and guidance, the government made some changes where they they felt they were needed. These included the following:
- Enabling fund of fund/collective arrangements to benefit from the change.
- When renegotiation of performance-based fees agreements is permitted.
- Explicitly covering in the definition of a specified performance-based fee, profit-sharing arrangements that include carried interest arrangements
- Permitting schemes to disclose where performance-based fees relate to the direct investments they apply to, if they wish.
- Including reference to the Productive Finance Working Group guidelines.
- Making it clear that fees can be paid by a third party on behalf of the trustee or manager.
- Clarifying that relevent occupational schemes must access the extent to which they represent good value for members. Schemes with under £100m in assets will not be required to include any specifed performance-based fees as part of their extended value for member comparison against three larger schemes.
The regulations and guidance exempting well designed performance-based fees from the charge cap are expected to be implemented in spring 2023. This change is intended to enable DC pension scheme to invest in illiquid assets including the Long Term Asset Fund (LTAF). The Government believe it will encourage scheme trustees, managers, and advisors to collaborate with fund managers to explore a fuller range of investment products and opportunities that have the potential to deliver better longer-term net returns for pension savers.
AREF's response to this consultation was submitted on 10 November 2022. A copy of this can be requested from RE:UK.
The October 2022 paper provided the Government’s response to the views they received regarding the Disclose and Explain Policy Proposals in Facilitating Investment in illiquid assets by DC pension schemes. They consulted on draft regulations and guidance to achieve the policy intent.
The government sought views on draft regulations and guidance on the exemption of performance-based fees from the regulatory charge cap proposals designed to stimulate illiquid investment by occupational DC pension schemes. The policy proposals were first outlined in their consultation Enabling investment in productive finance and have been developed further following the feedback the government received to that consultation and further follow-up engagement with a range of industry stakeholders.
DWP - Facilitating investment in illiquid assets
DWP published Facilitating investment in illiquid assets on 30 March 2022. This provided feedback on the Enabling Investment in Productive Finance consultation and the Future of the defined contribution market call for evidence. Also, it included consultations on new ‘Disclose and Explain’ proposals and proposed updates to ‘Employer-related investment’ regulations.
The ‘Disclose and Explain’ proposals were to amend the Statement of Investment Principles (SIP) requirements to ensure that relevant defined contribution (DC) pension schemes disclose and explain their policies on illiquid investment. Also, the Government proposed to introduce regulations that require relevant DC schemes with over £100million in total assets to publicly disclose and explain their default asset class allocation in their annual Chair’s Statement.
Charge Cap - Updated Guidance January 2022
The charge cap, which was introduced in 2015, applies to the default funds of DC schemes used for automatic enrolment. It prevents schemes from incurring costs and charges of more than 0.75% annually. This includes the management fees and costs of underlying funds through which schemes invest. This discouraged investment in illiquid assets for which the costs are typically relatively higher than, for example, investment in listed equities. Performance fees are particularly problematic as they increase as performance improves, so pension funds could be penalised if investments performed better than expected.
Since the introduction of the pensions charge cap in 2015 AREF lobbied Government to exclude property holding and maintenance costs from the cap. As a result, the Government clarified that such costs fall outside the cap and updated the Charge Cap Guidance to reflect this in January 2022. This allows pension savers to benefit from the diversification and returns that property offers.
DWP - Enabling Investment in Productive Finance
On 30 November 2021 DWP published a consultation, Enabling Investment in Productive Finance, on removing performance fees and carried interest from the charge cap for defined contribution (DC) pension schemes. AREF's response to this consultation was submitted on 18 January 2022. A copy of the response can be requested from RE:UK.
The proposal to exclude performance fees was welcomed by AREF and is something which AREF has previously lobbied for in responses to earlier DWP consultations including the one in Spring 2021 on Incorporating performance fees within the charge cap.
DWP - Future of the defined contribution pension market: the case for greater consolidation
On 21 June 2021 DWP published a call for evidence on the Future of the defined contribution pension market: the case for greater consolidation. AREF didn't response to this.
DWP - Incorporating performance fees within the charge cap & Improving outcomes for members of DC schemes
On 21 June 2021 DWP published their response to their consultations on Improving outcomes for members of DC schemes and Incorporating performance fees within the charge cap. (see below)
The Government are taking forward their proposal for DC schemes to report net investment returns. They have provided guidance on how net returns can be calculated and reported in the chair statement.
The Government have provided more clarity in the draft regulations that will allow the smoothing of performance fees over five years.
We note that the Government have confirmed that they will not be making changes to the status of carried interest or other performance fees within the charge cap at this stage. They are encouraging the industry to enter constructive discussions to find fee structures that fit better within DC schemes’ default arrangements, in order to facilitate investments which may unlock potential higher returns for pensions savers.
Currently, trustees of occupational DC pension schemes, when investing in closed-ended funds or pooled investment vehicles, should look-through to the costs paid by the funds when they invest in underlying investments. The Government have confirmed that, as a minimum, the current requirement needs to be clarified and may need to be changed to remove the requirement to look-through. The Government intends to liaise with industry and other partners over the coming months before making a final decision on this.
The final draft regulations have been published at the same time. Reporting of costs, charges and other information: guidance for trustees and managers of occupational schemes, will be effective from 1 October 2021. Completing the annual Value for Members assessment Reporting Investment Returns: Guidance for trustees of relevant occupational DC schemes, will be effective from 1 October 2021, subject to approval of corresponding draft regulations by Parliament.
Also, DWP launched a Call for Evidence on the Future of the defined contribution pension market: the case for greater consolidation to understand the barriers to further consolidation of the occupational trust-based Defined Contribution market in the UK. The deadline for responses was 29 July 2021.
DWP consultation: Incorporating performance fees within the charge cap
In March 2021 DWP published the consultation on Incorporating performance fees within the charge cap.
Included in this consultation was the Government's response to Chapter 3 'Diversification, performance fees and the default fund charge cap’ of the 2020 consultation Improving outcomes for members of defined contribution schemes. It also consulted on additional changes to regulations designed to facilitate the diversification of DC investment portfolios.
AREF's response to the consultation was submitted in April 2021. A copy of the response can be requested from RE:UK.
DWP consultation: Improving outcomes for members of defined contribution schemes
In September 2020, DWP published the consultation Improving outcomes for members of defined contribution schemes. AREF responded in October 2020.
The consultation included the Government’s response to the consultation Investment Innovation and Future Consolidation: A Consultation on the Consideration of Illiquid Assets and the Development of Scale in Occupational DC schemes. AREF's response to that consultation can be requested from RE:UK.
It also consulted further on changes to regulations and statutory guidance designed to improve DC pension scheme governance, promote the diversification of investment portfolios and signal our commitment to transparent disclosure to scheme members.
DWP - Illiquid Assets and the Development of Scale in Occupational DC schemes
In February 2019, DWP published the consultation Investment Innovation and Future Consolidation: A Consultation on the Consideration of Illiquid Assets and the Development of Scale in Occupational DC schemes.
AREF's response to this consultation was submitted in March 2019. A copy of the response can be requested from RE:UK.
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