Trustees should actively consider how to increase investment in less liquid assets and pension consultants should endorse their efforts to do so and integrate allocations to less liquid assets into their recommendations, a Bank of England/Treasury/FCA-chaired working party has concluded.
A report from the Productive Finance Working Group published today recommends the Department for Work and Pensions (DWP) confirm that transitional arrangements would be considered if the charge cap were to change to allow greater investments in illiquids. It urges the DWP to continue to monitor the overall impact of the charge cap and examine ways to embrace performance fees within DC.
The report recommends DC scheme decision-makers, including trustees and consultants, actively consider how increasing investment in less liquid assets could generate better value for their members. This should be supported by proactive communication from DWP and the Pensions Regulator (TPR) on investment in less liquid assets, says the report.
Industry participants and trade bodies have been called upon to develop guidance on good practice on liquidity management at a fund level, focusing on appropriate ranges for dealing frequency and notice periods for the different asset types for the Long-Term Asset Fund (LTAF). It also recommends that the FCA consults on changing its rules for investment in illiquid assets through unit-linked funds and reviews its rules for distribution to appropriate retail clients, respectively.
Throughout the report there is a heavy emphasis on shifting the focus of the DC consulting process away from cost to value. It says ‘DWP and TPR should consider ways to proactively communicate their supportive messaging on investment in less liquid assets’ for example publishing additional guidance for trustees.
DWP should continue with a DC schemes consolidation agenda, where it is clear that schemes are not providing value for members, says the report.
DC scheme trustees to assess their scheme’s ability to deliver value and access a diversified range of asset classes at its current scale in their consideration of whether to consolidate.
Industry participants and trade bodies should develop guidance on good practice on a toolkit for liquidity management at a fund level, in consultation with the FCA and Bank of England in the context of their broader work on liquidity classification for open-ended funds. This guidance should focus on appropriate ranges for dealing frequency and notice periods for different asset types.
The FCA should consult on removing the 35 per cent cap on investment in illiquid assets for all permitted links, where the underlying investor is not self-selecting their investments, says the report. The FCA should also review the application of the Financial Promotion rules to the LTAF, including the classification of the LTAF as a non-mainstream pooled investment (NMPI), once LTAFs are established. In addition, the FCA should consider further the appropriateness of applying this framework to the LTAF as part of its review of the potential safe distribution to retail investors more broadly, it says.
John Glen, economic secretary to the Treasury says: “The success of the LTAF, and investment in long-term assets more generally, is not just dependent on putting the right regulatory structure in place. It relies on a coordinated and holistic approach by government, regulators, investors and investment managers. The Productive Finance Working Group has been an invaluable forum to develop such an approach, which is set out in detail in this report and its recommendations. If implemented, these recommendations have the potential to deliver significant and beneficial changes for both individual savers and the wider economy.”
Andrew Bailey, governor of the Bank of England says: “It is vital that these recommendations are implemented in a timely manner, so that the benefits of greater investment in such assets are fully realised.”
Nikhil Rathi, CEO, Financial Conduct Authority says: “Products offering exposure to alternative assets, such as productive finance, can play an important part in an individual’s investments, particularly their pensions.”
Minister for pensions Guy Opperman says: “I welcome this report from our Productive Finance Working Group which explores how best to open up illiquid assets to Defined Contribution pension schemes.
“It sets out key recommendations for trustees of these schemes to transform their offering to pension savers. It is essential that all of us – asset managers, pension schemes, regulators, and others – deliver on these recommendations so that savers benefit from productive investment.”
Richard Butcher, chair, PLSA, says: “We support the Government’s ambition to ensure pension funds have the opportunity to invest in the widest range of assets to deliver good outcomes for savers. The work and recommendations of the Productive Finance Group will provide an important launch pad from which we can seek to resolve the detailed operational and systemic barriers that inhibit pension funds who wish to invest in productive finance and illiquid assets. If we can succeed in this ambition, there is a real opportunity for a win-win here: an alignment of the national interest with the interest of pension fund savers.
“It is always important to recognise, though, that the UK pensions sector, which looks after over £2trn of assets on behalf of tens of millions of savers is not homogenous. Each fund will, by law, have its own prudently managed well diversified investment strategy and an approach designed to suit its members particular needs. And above all else, trustees’ primary duty is to look after the saver first.”
