Key Takeaways
- • The FCA has proposed in consultation paper CP26/40 that certain performance fees be exempted from the 0.75% charge cap on workplace default pension schemes run by FCA-regulated firms, with comments due by 14 January 2027.
- • The regulator named private equity, venture capital and private credit funds as asset classes where the current cap limits schemes from considering investments because performance fees are more common there.
- • The FCA expects to publish final rules in summer 2027 after reviewing consultation feedback.
- • The proposals largely mirror a 2023 DWP exemption that already applies to trust-based schemes, with the FCA proposing additional safeguards on transparency and valuation scrutiny for contract-based pensions.
- • Fixed annual management fees, including those in blended fee agreements, would continue to count toward the cap under the existing framework.
Summary
The Financial Conduct Authority (FCA) has proposed exempting certain performance fees from the 0.75% charge cap applied to workplace default pension schemes run by FCA-regulated firms. The proposal is set out in consultation paper CP26/40, with responses due by 14 January 2027. The FCA said it expects to make final rules in summer 2027. The consultation would affect contract-based workplace pensions, private asset fund managers, independent governance committees, employers and savers in defined contribution (DC) schemes.
The charge cap, introduced in 2015, limits charges to 0.75% of funds under management in workplace default pension funds. The FCA said the cap was set because employers may have limited ability to influence the charges applied to their employees' pension savings. In its consultation paper, the regulator said the cap in its current form "limits pension schemes from considering asset classes where performance fees are more common," naming private equity, venture capital and private credit funds among them. The paper does not make a case specific to start-ups; its reference to venture capital sits within a broader list of private markets. A performance fee is a charge paid to a fund manager when returns exceed a pre-agreed level, rather than a fixed annual management fee.
The FCA said its proposals recognise the benefits of removing barriers to private market investment "where it's in savers' best interests," and that providers would need to maintain strong controls when agreeing performance fees. The regulator also proposes additional safeguards on transparency and on scrutiny of how private assets are valued.
The proposals follow a 2023 change by the Department for Work and Pensions (DWP), which exempted certain performance fees from the cap for trust-based schemes, effective from 6 April 2023. Under those rules, only performance-related fees meeting set criteria are excluded, and fixed annual management fees, including those within an overall fee agreement that also contains a performance element, continue to count toward the cap. The FCA said its proposals seek to replicate existing legislation and statutory guidance for trust-based schemes, with a limited number of additional safeguards and clarifications reflecting market developments since 2023 and recent supervisory insights.
The charge cap, introduced in 2015, limits charges to 0.75% of funds under management in workplace default pension funds. The FCA said the cap was set because employers may have limited ability to influence the charges applied to their employees' pension savings. In its consultation paper, the regulator said the cap in its current form "limits pension schemes from considering asset classes where performance fees are more common," naming private equity, venture capital and private credit funds among them. The paper does not make a case specific to start-ups; its reference to venture capital sits within a broader list of private markets. A performance fee is a charge paid to a fund manager when returns exceed a pre-agreed level, rather than a fixed annual management fee.
The FCA said its proposals recognise the benefits of removing barriers to private market investment "where it's in savers' best interests," and that providers would need to maintain strong controls when agreeing performance fees. The regulator also proposes additional safeguards on transparency and on scrutiny of how private assets are valued.
The proposals follow a 2023 change by the Department for Work and Pensions (DWP), which exempted certain performance fees from the cap for trust-based schemes, effective from 6 April 2023. Under those rules, only performance-related fees meeting set criteria are excluded, and fixed annual management fees, including those within an overall fee agreement that also contains a performance element, continue to count toward the cap. The FCA said its proposals seek to replicate existing legislation and statutory guidance for trust-based schemes, with a limited number of additional safeguards and clarifications reflecting market developments since 2023 and recent supervisory insights.
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