The FCA has proposed excluding certain performance-linked fees from the charge cap on default funds in workplace pensions it regulates.
Performance-linked fees are common in private markets, including private equity, venture capital, and private credit. According to the FCA, excluding them from the charge cap would give pension providers more flexibility to invest in a wider range of assets where this could improve long-term returns and value for savers. Providers would have the option, but no obligation, to use the exemption, and should only do so where it is in savers’ interests and they can meet the relevant protections.
Safeguards on fees and valuations
The FCA says greater flexibility is not a licence to charge more. Providers would need to weigh potential returns, risks, and costs carefully when making investment decisions, and any higher charges would have to be justified by additional value for savers. The proposals also include safeguards on transparency, the 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 required to assess whether performance-linked fees offer value for money. Therese Chambers, Executive Director of Enforcement and Market Integrity at the FCA, stated that people’s pension savings should work hard for them, and that the regulator wants providers to have greater choice over how they invest for the long term where this can deliver better outcomes.
Aligning contract-based and trust-based schemes
According to Chambers, any higher charges must be justified by additional value, with firms weighing returns, risks, and costs when deciding what is in savers’ best interests. The proposals would bring FCA rules for contract-based workplace pensions more closely into line with the regime for trust-based schemes, where certain performance-linked fees have been excluded from the charge cap since 2023.
According to the FCA, closer alignment would support competition and choice, and reduce unnecessary complexity for providers operating in both parts of the pensions market. The regulator is seeking responses to the consultation by 14 January 2027 and expects to publish final rules in summer 2027, after considering the feedback it receives.
