FCA Consults on Excluding Performance Fees From Workplace Pension Charge Cap

The Financial Conduct Authority on Thursday launched a consultation on whether to let providers of contract-based workplace pensions exclude certain performance-linked fees from the charge cap that applies to default funds, in a move the regulator said could widen access to private-market investments while keeping protections for savers in place.

The proposal, set out in consultation paper CP26/40, “Exempting performance fees from the workplace pensions charge cap,” would apply to default funds in FCA-regulated contract-based workplace pensions. The FCA said performance-linked fees are common in private markets such as private equity, venture capital and private credit, and that changing the rules could give providers more flexibility to invest for the long term where that could improve returns and overall value for savers.

The regulator stressed that the change would be optional, not mandatory. Providers would not be required to use the exemption, and the FCA said the proposal should not be seen as permission to raise charges generally. Any higher charges would need to be justified by extra value delivered to savers, it said, with firms expected to weigh costs, risks and likely returns before deciding whether such investments are in members’ interests.

The consultation also proposes a set of safeguards. Those include greater transparency and “look-through” disclosure of underlying costs, scrutiny of valuation practices and governance, fair allocation of fees between savers, and making sure providers and their Independent Governance Committees have enough information to judge whether members are receiving value for money. The FCA said firms should not proceed if they cannot establish that valuation governance is adequate.

“People's pension savings should work hard for them. We want providers to have greater choice over how they invest for the long term where this can deliver better outcomes for savers. 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, the FCA’s executive director of enforcement and market integrity, said in a press release.

The current charge cap for default workplace pension funds was introduced in 2015 to protect members who are placed into these funds and typically do not actively choose the investments or negotiate fees. It limits charges to 0.75% of funds under management. The FCA said its latest proposal would bring the rules for contract-based pensions closer to those for trust-based occupational defined-contribution schemes, where certain performance-based fees have been excluded from the cap since April 2023 following changes by the Department for Work and Pensions.

The regulator said aligning the two regimes could support competition and choice and reduce complexity for providers that operate in both the contract-based and trust-based markets. But for now, the change remains at the consultation stage rather than a final rule.

The consultation is open until Jan. 14, 2027. The FCA said it currently expects to publish final rules in summer 2027 after considering responses.