Charge cap crack: FCA opens workplace pensions to performance fees

The FCA has moved to prise open the workplace pensions charge cap, consulting on excluding certain performance-linked fees from the cap that applies to default funds in contract-based schemes (FCA). The proposals, set out in CP26/40, would bring FCA rules closer to the trust-based regime, where equivalent fees have sat outside the cap since 2023 (FCA). Responses close on 14 January 2027, with final rules expected in summer 2027 (FCA).

A targeted adjustment, not a deregulation

The framing matters. Therese Chambers, executive director of enforcement and market integrity at the FCA, said that 'greater flexibility is not a licence to charge more' and that 'any higher charges must be justified by additional value' (FCA). That is a direct signal to boards: the exemption is engineered to channel capital into illiquid growth assets, not to rehabilitate expensive active mandates. Providers that treat the change as headroom for fee expansion rather than as an investment design question will attract supervisory attention.

The structural effect is to harmonise contract-based and trust-based regimes, which the FCA explicitly says should 'support competition and choice and reduce unnecessary complexity for providers operating across both parts of the market' (FCA). For master trusts and group personal pension providers running parallel propositions, the operational case for divergent default fund construction weakens. Expect consolidation of investment architecture across the two regimes.

Governance load shifts to IGCs and valuations

The safeguards are where the real work sits. Providers and Independent Governance Committees 'would need access to the information necessary to assess whether performance-linked fees offer value for money' (FCA). IGCs, already stretched by Consumer Duty value assessments, will need the technical fluency to interrogate private market valuation methodologies, fee waterfalls and allocation mechanics between saver cohorts. Chairs should be commissioning capability reviews now, not after the final rules land.

Asset managers courting workplace pension distribution face a parallel reckoning. Fund terms built for institutional LPs, with bespoke hurdles, catch-ups and side letters, will need to be reframed for a default fund context where fair allocation between members is a regulatory test, not a commercial nicety. Expect fund structures to evolve, with simpler, more auditable performance fee mechanics designed specifically for DC distribution.

The wider pensions reform signal

The FCA positions the consultation as part of its Pensions Regulatory Priorities and 'the wider pensions reform' (FCA). Read alongside government ambitions to channel DC capital into UK productive assets, the direction is consistent: remove technical friction, keep saver protections, and let scale do the work. The charge cap is not being dismantled, it is being made porous in defined, governed ways.

For senior leaders, the question is no longer whether private assets belong in defaults, but whether their governance, valuation and member communication machinery is ready to defend the decision when the FCA, or an IGC, asks.