FCA Proposes Pension Investment Flexibility to Boost Long-Term Returns for Savers

The Financial Conduct Authority is consulting on plans to exclude performance-linked fees from the charge cap for default workplace pension funds. This shift aims to unlock investment in private markets, such as venture capital and private equity, potentially boosting long-term returns for savers while aligning FCA-regulated schemes with existing trust-based pension frameworks.

What was announced

The consultation focuses on removing certain performance-linked fees from the 0.75% charge cap that currently applies to default funds in workplace pension schemes regulated by the Financial Conduct Authority (FCA). These fees are a staple of private market investments, including private equity, venture capital, and private credit. By allowing these costs to sit outside the cap, the regulator intends to give pension providers the flexibility to pursue higher-yield, long-term investment strategies that were previously difficult to square with strict cost limits.

The move is designed to bring FCA-regulated schemes into alignment with trust-based pension schemes, which have benefited from similar exclusions since 2023. This regulatory parity is expected to reduce administrative complexity for firms operating across both segments of the market. However, the FCA has emphasized that this is an optional exemption rather than a mandate. Providers must demonstrate that any higher charges are justified by the additional value delivered to savers, weighing potential returns against risks and costs.

To protect consumer interests, the proposal includes several safeguards. These cover the transparency of fee structures, the fair allocation of fees between different groups of savers, and rigorous scrutiny of how private assets are valued. Independent Governance Committees and providers would be required to access specific information to assess whether these fees offer genuine value for money. The FCA is seeking responses to these proposals by 14 January 2027, with a view to implementing final rules in the summer of 2027 following the feedback period.

"But greater flexibility is not a licence to charge more. Any higher charges must be justified by additional value, with firms carefully weighing returns, risks and costs when deciding what is in savers' best interests."

Therese Chambers, executive director of enforcement and market integrity at the FCA.

The companies involved

The Financial Conduct Authority (FCA) is the primary conduct regulator for the UK’s financial services industry, overseeing the activity of approximately 50,000 firms. Its mandate involves ensuring that financial markets function well, protecting consumers from harm, and fostering healthy competition. The regulator is an independent public body, though it maintains a close relationship with the UK Treasury and Parliament to align financial regulation with national economic goals.

In the pensions sector, the FCA regulates personal and stakeholder pensions, as well as some workplace schemes, while the Pensions Regulator (TPR) typically oversees trust-based schemes. This dual-regulator environment has historically led to slight discrepancies in rules, which the current proposals seek to rectify. The FCA’s influence extends deep into the fintech ecosystem, where it manages various innovation hubs and regulatory initiatives. As the UK seeks to unlock "productive finance," the FCA’s role has shifted toward enabling investment in illiquid assets, such as private equity and infrastructure, which were previously sidelined by rigid fee structures and liquidity requirements in defined contribution schemes.

What FF News has reported before

FF News has closely followed the regulator’s expanding remit and its interventions across various financial sectors. Recently, the regulator took steps to address consumer harm in the lending space, as seen when the FCA Intervenes to Protect Consumers from Disguised Remuneration Loan Repayment Demands. The authority has also been active in emerging technology, having recently Launched a Quantum Experimentation Group to Combat Financial Crime.

In the realm of sustainable finance and consumer standards, the regulator Introduced First-Ever ESG Rating Provider Regulations to Boost Market Transparency and Set New Standards for Early Car Finance Compensation Settlements. These actions underscore the FCA's dual focus on market innovation and the prevention of systemic consumer detriment.

What this means

This move represents a fundamental pivot in the UK’s regulatory philosophy, shifting the focus from "cheapest is best" to a more nuanced "value for money" framework. By allowing performance fees to sit outside the cap, the FCA is effectively challenging the dominance of low-cost passive index tracking in default funds. This creates a significant opportunity for private market investment platforms and fintechs that facilitate fractional access to illiquid assets. However, the industry now faces the daunting task of proving that the higher costs associated with private equity and venture capital will actually translate into superior net returns. The pressure is now on pension providers to upgrade their valuation and reporting capabilities to meet the FCA’s transparency requirements.