The Financial Conduct Authority (FCA) has proposed exempting certain performance fees from the 0.75% charge cap on workplace default pension schemes run by FCA-regulated firms, with comments due by 14 January 2027.
The consultation, CP26/40, would affect contract-based workplace pensions, private asset fund managers, independent governance committees, employers and savers in defined contribution (DC) schemes. The FCA said it expects to make final rules in summer 2027 after considering feedback.
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”. It named private equity, venture capital and private credit funds among those asset classes.
The paper does not make a case specific to start-ups. Its reference to venture capital sits within a list of private markets that the cap currently makes harder for schemes to consider.
The charge cap was introduced in 2015 and limits charges to 0.75% of funds under management in workplace default pension funds. The FCA said it was set because employers may have limited ability to influence the charges applied to their employees’ pension savings.
A performance fee is a charge paid to a fund manager when a fund’s returns exceed a pre-agreed level, rather than a fixed annual management fee. Such fees are common in private equity, venture and growth capital and private credit.
The FCA said its proposals recognise the benefits of removing barriers to private market investment “where it’s in savers’ best interests”. It added that providers would need to maintain strong controls when agreeing performance fees.
The regulator is also proposing additional safeguards on transparency and on scrutiny of how private assets are valued.
The proposals follow a change made in 2023, when the Department for Work and Pensions (DWP) exempted certain performance fees from the cap to support pension fund investment in private assets. That exemption applies to trust-based schemes.
The FCA said its proposals seek to replicate existing legislation and statutory guidance for trust-based schemes. In a limited number of areas, it also proposes additional safeguards and clarifications reflecting market developments since 2023 and recent supervisory insights.
The DWP’s statutory guidance said the 2023 Regulations took effect from 6 April 2023. They allow trustees and managers to enter arrangements that include performance-based fees and to exclude them from charge cap calculations.
The guidance said the exclusion is meant to make it easier for schemes to reach asset classes where such fees are more prevalent. It applies where trustees or managers believe the investment is in members’ best financial interests.
Under the 2023 rules, only fees that meet set criteria are excluded. Performance-based fees that do not meet them can still be used, but remain subject to the cap.
The exemption also does not cover fees unrelated to performance. Annual fixed management fees, including those in an overall fee agreement that also contains a performance element, continue to count towards the cap, according to the January 2023 guidance.
The FCA said responses can be sent through its online form by 14 January 2027.
