Exempting Performance Fees from the Workplace Pensions Charge Cap (Financial Conduct Authority)

Summary

• The charge cap, introduced in 2015, limits charges to 0.75% of funds under management in workplace default pension funds.p.3
• The FCA proposes to exempt certain performance fees from the charge cap for workplace default pension schemes, to support investment in private assets.p.3
• The proposal follows the Mansion House Accord agreed in May 2025, where 17 major UK pension providers cited alignment of the performance fee regime.p.4
• The FCA expects to make final rules in summer 2027, and comments are requested by 14 January 2027.p.23
• The proposed exemption is permissive rather than mandatory.p.6
• The FCA estimates that increased private market investment could increase median net returns to savers by 2.1% over the 10-year appraisal period.p.28
• Certainty-equivalent annual returns are estimated to increase from 8.45% to 8.68%.p.28

Key insights

1. In 2023, the DWP exempted certain performance fees from the charge cap to support pension fund investment in private assets.p.3
2. The FCA aims to align the regimes for trust-based and contract-based schemes to minimise administrative burden and avoid regulatory arbitrage.p.6
3. Performance-based fees are frequently used for private equity, venture and growth capital, and private credit.p.7
4. A typical 2 and 20 model has the general partner taking 20% of the carry above the hurdle rate return.p.8
5. Fund of funds managers typically charge a 0.5% to 1.0% management fee and sometimes a smaller 5% to 10% carried interest tier.p.8
6. The FCA proposes pre-agreed terms between provider and manager on how performance fees are calculated and when payment is due.p.10
7. Private asset valuations are model-based and rely heavily on the judgement of the manager or third party valuer.p.20
8. In 2021, DWP formalised an exemption from the charge cap of costs attributable to holding physical assets, and the FCA proposes to exempt such costs for contract-based schemes.p.22
9. The cost benefit analysis focuses primarily on the 8 Mansion House Accord signatories operating contract-based schemes.p.27