Steven Cameron, Pensions Director at Aegon said: “This consultation is the latest in a series of Government and regulatory interventions determined to remove barriers to generate greater investment in illiquid or ‘productive finance’ assets (See Footnote). The Government clearly sees this as a key means of building Britain back better.
“Trustees, in pursuit of good member outcomes, should give full consideration to a broad range of asset classes. But many illiquid funds have performance-related fees, which could easily fall foul of the auto-enrolment default fund charge cap. Removing such fees from the charge cap is a radical means of opening up new investment opportunities, but risks undermining the current simple messages around the protection members receive from the cap.
“Investing in any form of illiquids is complex, requiring detailed scenario testing of the likely additional risk, returns and costs over various time periods and allowing for changing market conditions. Choosing investments with performance fees adds a further layer of complexity and ensuring these are well-designed will be key to ensuring members truly benefit.
“More fundamentally, DC scheme members expect to be able to switch funds, transfer to a new scheme or access their benefits flexibly under pension freedoms without the delay of a notice period. This makes finding solutions to daily pricing and liquidity management of higher priority than enabling performance fees.
“Once fund managers launch new Long Term Asset Funds (LTAFs) designed specifically to hold illiquids, some DC schemes may invest a proportion of their default funds in these. This will allow them to draw on the specialist expertise of the LTAF manager and achieve diversification compared to individual illiquid investments. Whether or not LTAFs have performance fees is yet to be seen and is likely to depend on the outcome of this consultation.”
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