Interactive Investor

Retirement outcomes of individual pension savers should remain primary goal, says ii

30th November 2021 11:33

Rebecca O'Connor from interactive investor

Our head of pensions and savings comments on the consultation launched today by the DWP on changes to the pensions charge cap.

The Department for Work and Pensions this morning outlined changes to the Pensions Charge Cap in a consultation on ‘Enabling Investment In Productive Finance’.

The proposals suggest that the charge cap of 0.75% no longer includes performance-related fees, to enable investment in more illiquid investments.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “The theory is that the removal of the charge cap should ultimately lead to higher returns for pension scheme members, as managers will be able to access illiquid, venture capital and private equity-style investments that would require them to charge more, but would generate more growth.

“The theory makes sense, particularly amid forecasts of lower long-term stock market growth* and the impact on pension pot sizes on retirement, but whether it works out in practice and the returns end up justifying the higher charges remains to be seen.

“There’s a risk that the promised returns fail to materialise, despite the higher fees, which would look like pension scheme members paying middlemen more, for less. So it will be very important that higher fees are only charged when it can be justified.

“Keeping fees as low as possible in the absence of stellar investment growth can make a big difference to people’s retirement outcomes. It’s important to bear in mind that the retirement outcomes of individual pension savers should be the primary goal of a pension scheme, rather than the need to finance risky infrastructure projects. If the two goals are complementary and can be achieved together, that’s great, but the latter mustn’t come at the expense of the former.

“People should also be able to find out where their pension money is being invested on their behalf and why. New investment opportunities in pensions could lead to greater engagement and understanding. On the other hand, if people don’t feel convinced by the cost/return trade-off they are presented with, will they be able to compare it with other providers and will they be able to move away easily if they aren’t satisfied they are getting a good deal?”

Notes to editors:

  • Lower long-range growth forecasts were highlighted in an ii/ LCP report published in May 2021: ‘Is 12% the new 8%?

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