Why a charge cap review and a focus on patient capital might change the way DC schemes think about investments

Chancellor Phillip Hammond may not have mentioned pensions once in his budget speech this year, but that doesn’t mean there weren’t a few changes hidden in the red book.

One big piece of news was a plan to make it easier for schemes (and DC plans in particular) to invest in patient capital.


This type of investment offers the potential for high returns for those prepared to take a risk on innovative companies.

However, many schemes have been locked out of these asset classes, in part because of illiquidity, high costs, and the need for long-term investment horizons.

But the government wants to unlock the over £1trillion invested by DC schemes and make it easier to divert some of this money to shore up UK enterprise.

Specifically the budget documents said that:

  • The government will support pension funds investment in growing UK businesses, through the British Business Bank
  • the FCA will publish a discussion paper by the end of 2018 to explore how effectively the UK’s existing fund regime enables investment in patient capital
  • the FCA will consult by the end of 2018 on updating the permitted links framework to allow unit-linked pension funds to invest in an appropriate range of patient capital assets

Several of the largest defined contribution pension providers in the UK have already committed to work with the British Business Bank to explore options for pooled investments of this type, including Aviva, HSBC, L&G, NEST, The People’s Pension, and Tesco Pension Fund.

Steven Cameron, pensions director at Aegon said: “With some members remaining invested for decades… an element of riskier patient capital investment may be worth considering.

Trustees and schemes nmust not bow to the latest political pressure to invest in a certain way

“However, people do change jobs and transfer their pensions, meaning schemes need to ensure they also have sufficient liquidity. Patient capital investments may not be priced daily which creates a challenge for schemes.”

Darren Philp, Head of Policy at Smart Pension, added: “While DC pension funds do need to diversify away from the traditional asset classes and incorporate alternatives into their portfolios, they are expensive and not necessarily conducive with the fee pressure in the DC world.

“Funds should only invest where it is in their interests to do so. While opening up alternative asset classes is welcome, Trustees and schemes need to ensure they are doing what’s right for scheme members and not simply bow to the latest political pressure to invest in a certain way.

There are many additional considerations that trustees need to take into account when considering this type of investment. These include efficiency of the investment vehicle, cost, due diligence, and cash flow management.

As part of the push for schemes to consider patient capital investment, the government has also said that it will review the charge cap applied to DC workplace schemes.

There are many additional considerations that trustees need to take into account when considering this type of investment

It said: “DWP will consult in 2019 on the function of the pensions charge cap to ensure that it does not unduly restrict the use of performance fees within default pension schemes, while maintaining member protections.”

But this announcement, tucked away in the budget documents has wider ranging implications for DC schemes, beyond whether they are able to invest in patient capital.

Tom Selby, senior analyst at AJ Bell concluded: “Ultimately the aim of auto-enrolment default funds schemes is to maximise returns for retirement investors over the long-term rather than back particular sectors or businesses.

“If the charge cap were increased for certain types of investments, the trustees of that scheme would have to be confident the extra price paid by members was still money well spent.”