The Financial Conduct Authority has launched a consultation on excluding certain performance-linked fees from the charge cap for default funds in workplace pensions it regulates.
The move would give pension providers greater flexibility to access a broader range of investments, helping them to improve long-term returns and deliver better outcomes for savers.
Performance-linked fees are common in private markets, including private equity, venture capital and private credit.
However, the FCA stressed that greater flexibility should not be taken as an opportunity to charge more. It said providers should carefully weigh potential returns, risks and costs when making investment decisions, and any higher charges should be justified by the additional value delivered to savers.
It said the proposals would give providers an option, not an obligation, to use the exemption and they should only do so where it is in savers’ interests, and they can meet the relevant protections.
The proposals would bring the FCA’s rules more closely in line with the regime for trust-based pension schemes, where certain performance-linked fees have been excluded from the charge cap since 2023.
Therese Chambers, executive director of enforcement and market integrity at the FCA, said: “People’s pension savings should work hard for them. We want providers to have greater choice over how they invest for the long term where this can deliver better outcomes for savers.
“But greater flexibility is not a licence to charge more. Any higher charges must be justified by additional value, with firms carefully weighing returns, risks and costs when deciding what is in savers’ best interests.”
Alongside the proposed flexibility, the regulator is proposing safeguards covering transparency, fair allocation of fees between savers and scrutiny of how private assets are valued.
Providers and Independent Governance Committees would need access to the information necessary to assess whether performance-linked fees offer value for money.
Gareth Trainor, director of investment propositions at Royal London, welcomed the news: “The charge cap plays an important role in protecting workplace pension savers from excessive costs, but it shouldn’t stand in the way of investments that could deliver better long-term outcomes for them.
“We welcome the FCA looking again at how the rules work in practice. Getting the balance right between keeping costs under control and supporting greater investment in private markets could create greater opportunities for pension savers, while also unlocking potentially more investment in the UK economy.”
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