Should pension savers put more money into ‘illiquids’?

8th October, 2021

  • An official working group, set up and chaired by UK authorities, certainly thinks so.

    In their just published report and recommendations[1], the Productive Finance Working Group (PFWG), calls on government, the Financial Conduct Authority and the pensions industry to promote the Long-Term Asset Fund (LTAF), a proposed new authorised open-ended fund structure that the Chancellor has committed to launch and the Financial Conduct Authority has consulted on.

    According to the PFWG, appropriately managed investment in long-term assets has the potential to generate better returns for investors including, because of their typically longer-term investment horizons, those saving in defined contribution (DC) pension schemes. Benefits to the wider economy, climate change and supporting financial stability are also cited.

    In the 50-page report – A Roadmap for Increasing Productive Finance Investment – the case for investment in less liquid assets is set out, along with current barriers to DC schemes’ investment in such assets.

    The recommendations of the PFWG include:

    • Shifting the focus to long-term value for DC pension. The PFWG 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. And the Department for Work and Pensions (DWP) should find ways to accommodate investment managers’ remuneration structures within the DC charge cap.
    • Building scale in the DC market. DWP should continue with a DC schemes consolidation agenda where it is clear that schemes are not providing value for members. Trustees of DC schemes should consider whether their scale is a barrier to good member outcomes, including to the potential benefits of greater investment in less liquid assets.
    • A new approach to liquidity management. Industry participants and trade bodies should 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 LTAF.
    • Widening access to less liquid assets. To support the distribution of less liquid assets, including via the LTAF, to a broader range of investors, including DC schemes and retail, when appropriate, the PFWG 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. Specifically, the PFWG suggests removing the 35% cap on investment in illiquid assets for all permitted links, where the underlying investor is not self-selecting their investments.

    A diagram, reproduced below, puts the implementation of the recommendations in a broader context of a series of actions that aim to facilitate greater investment in less liquid, long-term assets.

    Early responses to the report have been broadly positive, with the Pensions Regulator (TPR), PLSA and ABI all welcoming it. TPR stated that DC assets are expected to reach £1trn by 2030, creating opportunities for innovation in DC.

    In any event, the FCA is expected to publish its final rules for the LTAF shortly (possibly alongside the Treasury’s work on the LTAF’s tax treatment). Industry members of the PFWG and the official sector have committed to moving forward the report’s proposed recommendations. According to the report:

    “Without such actions by all stakeholders, greater investment in less liquid assets and the opportunity of securing greater potential long-term value for pension scheme members in their retirement will be harder to achieve. Crucially, this will also require broader action across the industry, not just the Working Group members. We will meet in early 2022 to monitor the progress in implementing these solutions and consider any further action.”

    [1] A roadmap for increasing productive finance investment (

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    • Published byPaul Tinslay

      Paul Tinslay is a Professional Trustee for DB and DC Pension Schemes, including Chair for Sole Trustee positions, and EGLAS arrangements. With 33 years in the Life and Pensions Industry, Paul has the very rare, if not unique experience of...

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