Almost every institutional investor knows the struggle of balancing expensive asset management fees with the potential of missing out on gains due to investing too passively. Different boards and governments have dealt with this issue in their own way, but the UK has taken a unique approach.
In April 2015, the country put a 0.75% cap on fees for UK residents who are automatically enrolled in a defined contribution (DC) pension by their employers. Pension contributors can opt in to a plan with higher management fees if they choose, but the default is the simplest option for many participants.
This cap hasn’t sat too well with asset managers, however, according to the Productive Finance Working Group, a panel co-chaired by the Bank of England, the UK’s Treasury, and financial regulators. Many asset managers believe they are missing out on significant private equity and venture capital gains, which often demand higher fees. Government officials are especially worried that staying out of private equity will prevent investments in a greener economy.
Given these concerns, this past Tuesday, the UK government proposed allowing well-designed performance fees to be exempt from the 0.75% cap requirement, according to the Financial Times.
The move has the potential to put billions of dollars into private equity investments. It would be part of a growing trend of pensions looking into alternative investments in the wake of an unprecedented year of large returns. In 2021, private equity broke records for multiple pensions in the United States and was the top-performing asset in many portfolios.
While the exact definition of a “well-designed performance fee” is not yet clear, it will likely mean pensions will not pay a fee unless the funds they invest in perform significantly well.
The government says it plans on consulting with members of the industry until Jan. 18, before it makes any final decisions regarding the regulatory cap. Those interested in providing feedback to the government can find further information about the program here. The consultation is specifically aimed at pension plan managers, trustees, members, beneficiaries, and industry professionals. Other stakeholders in the issue are welcome to request to be a part of the consultation program, as well.
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Tags: Active Management, AUM, charge cap, ESG, fee cap, institutional investor, passive management, Pension, Private Equity, UK, Venture Capital