FCA proposes taking performance fees outside the workplace pension default fund charge cap

The Financial Conduct Authority is consulting on excluding certain performance-linked fees from the charge cap on default funds in the workplace pensions it regulates, it said on 12 November.

The cap limits charges to 0.75% of funds under management in workplace default pension funds, so the change would let providers pass on some fees that currently count towards that ceiling.

Therese Chambers, executive director of enforcement and market integrity at the FCA, said: “People’s pension savings should work hard for them.”

She added that “greater flexibility is not a licence to charge more” and that any higher charges must be justified by additional value.

Performance-linked fees are common in private markets, including private equity, venture capital and private credit, the regulator said.

In its consultation paper, CP26/40, the FCA said the cap in its current form limits schemes from considering asset classes where such fees are more common, potentially reducing the value they can deliver.

The proposals would give providers an option, not an obligation, to use the exemption, and the FCA said they should do so only where it is in savers’ interests.

The regulator is also 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.

How the 0.75% cap has worked since 2015

The charge cap was introduced in 2015. The government guidance says it came into effect that April and is set at 0.75% of funds under management within the default arrangement.

Default arrangements are those used by members who have not actively chosen an investment fund, within certain schemes employers use to meet their automatic enrolment duties.

The cap was introduced because employers may have limited ability to influence the charges applied to their employees’ pension savings, the FCA said.

What changed in 2023

In 2023 the Department for Work and Pensions exempted certain performance fees from the cap to support pension fund investment in private assets. The FCA said its proposals seek to replicate that regime.

An explanatory memorandum prepared by the department for that year’s regulations said “specified performance-based fees” would fall outside the cap calculation.

The same document said the cap applies to all scheme and investment administration charges, excluding transaction costs and a small number of other charges.

It also said the Pension Charges Survey 2020 showed two-thirds of defined contribution occupational pension schemes had no direct investment in illiquid assets in their default funds.

Those exemptions currently apply to trust-based schemes. The FCA said its proposals would bring its rules for contract-based schemes more closely into line with that regime.

The regulator said greater alignment would support competition and choice and reduce unnecessary complexity for providers operating across both parts of the market.

In a limited number of areas, it also proposes extra safeguards and clarifications reflecting market developments since 2023 and recent supervisory insights.

Who is affected and what happens next by 14 January 2027

The consultation is aimed at private asset fund managers, firms operating contract-based workplace pensions, trustees and sponsors, employers, consumer organisations and pension savers.

Providers will need to maintain strong controls when agreeing performance fees to make sure they are in savers’ interests, the FCA said.

The consultation is open until Thursday 14 January 2027, and the FCA currently expects to make final rules in summer 2027 after considering feedback.