FCA consults on performance fees and charge cap

The Financial Conduct Authority has published a consultation, with draft rules, on exempting certain performance fees from the 0.75% charge cap for default arrangements in contract-based workplace schemes.

Occupational schemes (including master trusts) have had a comparable exemption since 2023. The FCA's proposals are largely modelled on it. This means that GPP providers would be able, if they choose, to invest default funds in assets where performance fees are commonplace, such as private equity, venture capital and private credit, on much the same footing as trust-based schemes.

There are no major surprises within the consultation. However, the FCA is proposing to add some safeguards of its own, most notably a rule on valuation due diligence. The FCA is clear that "greater flexibility is not a licence to charge more".

Key points are summarised below.

Background

The charge cap has applied since April 2015. For trust-based schemes it is set by the Department for Work and Pensions in regulations. For contract-based schemes the FCA imposes the cap in its Conduct of Business sourcebook (COBS).

Changes made by the DWP in 2021 and 2023 created two carve-outs from the cap: one for costs solely attributable to holding physical assets, and another for "specified performance-based fees". The DWP carve-outs apply only to trust-based schemes. The FCA's rules have not kept pace.

The FCA signalled a review in its December 2025 letter on growth, as reported in our Spring 2026 Pensions Planner. The issue has gained traction because of the Mansion House Accord, whose signatories aim to invest 10% of main DC default funds in private markets by 2030. Signatories have said that alignment of the charge cap is a "critical enabler" for the Accord.

Which fees will qualify?

Under a proposed new COBS 19.6B, a "qualifying performance-based fee" will fall outside the definition of "administration charge", and so outside the cap. A fee will qualify only if both of the following conditions are met:

• The fee is calculated only by reference to an increase in investment performance. This is a principles-based test which covers carried interest. Base management fees (eg the "2" in a "2 and 20" structure) remain within the cap.
• Before investing, the provider has formally agreed terms with the manager, covering the performance hurdle, the calculation period, when and how payment is due, measures to smooth out short-term fluctuations, and the provision of information on request.

Where a provider cannot negotiate terms directly, it will have to confirm that the required terms are in place before investing. Providers will have to review terms regularly, and seek an appropriate amendment if they conclude that a term is no longer appropriate.

Safeguards

Alongside the exemption, the FCA proposes the following:

• Information sharing: a fee will qualify only if the manager has agreed to disclose performance-fee information on request. This goes further than the trust-based regime. 
• Valuation due diligence: before making an investment which may incur a performance fee, providers will have to establish on reasonable grounds that appropriate valuation policies and procedures are in place. Supporting guidance covers matters such as independence, conflicts (eg continuation vehicles) and the use of third-party valuers.
• Independent Governance Committees: IGCs' terms of reference will have to refer expressly to scrutinising performance fees, and IGC reports will have to state qualifying fees for each default arrangement as a percentage of average assets. Peformance fees will need to be taken into account for value-for-money purposes, even if carved out from the cap.
• Commercial terms and fairness: no new rules are proposed. Instead the FCA will rely on the Consumer Duty and other existing obligations, and on guidance taken from the DWP's statutory guidance. Providers will be expected to assess whether performance fees can deliver additional value which outweighs the cost to members and would not be achievable through a flat-fee structure. Providers will need to take reasonable steps to allocate performance fees and benefits fairly so that, as far as possible, members who bear the fees benefit proportionately from the associated performance.

Physical assets

The FCA proposes to carve out, for cap purposes, costs solely attributable to holding physical assets, such as property and infrastructure, in line with the trust-based regime. Unlike the DWP exemption, though, valuation fees would stay inside the cap.

Wider questions

The FCA and the DWP ask for evidence on how the charge cap is working more generally. The FCA also invites industry-led solutions to uncertainty over whether some charges fall within the cap. The DWP will consider changes to the trust-based regime "case by case", using the FCA's evidence.

Next steps

The consultation closes on 14 January 2027. The FCA expects to make final rules in summer 2027. A commencement date has not yet been set.

Comment

The change is welcome and overdue. Since 2023, a provider offering both a master trust and a GPP has been able to pay performance fees outside the cap in one but not the other. If and when the FCA's proposals take effect, contract-based and trust-based schemes will be largely on a level playing field, removing an acknowledged obstacle to investment in productive assets.

"Largely" is the word, however. The FCA's additions, particularly the information-sharing condition and the valuation rule, make the contract-based regime somewhat stricter. Managers may need to adapt their standard terms. It remains to be seen whether the DWP will amend the regulations for trust-based schemes, to fully align the two regimes.