Industry experts have welcomed the Financial Conduct Authority’s finalised rules on the Long-Term Asset Fund (LTAF), although concerns remain around the charges involved and potential delays for members due to liquidity issues.

The FCA yesterday (25 October) published the finalised rules for its LTAF framework, which is expected to encourage greater investment in long-term illiquid assets and generate better returns for pension savers.

Hymans Robertson head of DC investment, Callum Stewart, noted that the proposal to remove the upper limit on exposure to investments for LTAFs in particular will help address one of the current constraints with existing fund types that has limited innovation.

“As always, however,” he added, “we should consider member needs first. This development should support greater product innovation and choice for DC schemes, and ultimately improve outcomes for members.

"Member security and the transparency of costs and charges are also important considerations.”

Adding to this, Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, agreed that investing in illiquid assets could offer a “huge opportunity” for investors to boost their pension pots, clarifying however, that investor understanding will play a key role in this.

“For this to succeed investors need to be very clear on what they are invested in, what they are paying and what their rights are when it comes to issues such as redemptions and dealing – getting this right is vital to building confidence in LTAFs and making them a mainstream part of the defined contribution landscape in the future,” she said.

Aegon pensions director, Steven Cameron, also highlighted the LTAF’s as a “key stage in the critical path towards DC pensions investing more in illiquid”, emphasising that they are at the “heart" of the ‘investment big bang’ that the Prime Minister and Chancellor have been calling for.

However, Cameron warned that an overnight ‘big bang’ rush is unlikely, as members of DC schemes now expect their pension funds to be priced daily and to be able to switch funds, transfer between schemes or access their pensions flexibly, all without any delay or notice period.

He explained: “LTAFs will have notice periods of various lengths and the underlying assets won’t have daily prices with redemptions no more frequently than monthly.

“One consideration will be the length of notice periods set by LTAFs with the FCA prescribing a minimum of 90 days but with some likely to be far longer if targeting certain types of illiquid investment.

"Arrangements for arriving at a daily price between LTAF valuation points to feed into the default fund price will all be critical.

“Schemes will also need to explore how to manage liquidity within the default fund, when the proportion in the LTAF is not readily realisable. This will in turn require detailed scenario planning including for extreme events and a full understanding of regulatory and capital requirements.”

AJ Bell head of investment analysis, Laith Khalaf, suggested that there could also be cost concerns, noting that any additional long-term returns will need to be weighed up against the charges for investing in LTAFs, particularly in light of the charge cap on pension default funds.

"Private equity investment for example, is not exactly known for its bargain basement fees, and pension schemes will have to assess the benefit of investing in illiquid assets against any additional costs to members," he explained.

“Many pension schemes have already shifted heavily towards passive funds to keep charges down, and may be reluctant to see their annual management charge creeping back up.”

Similar fears have already been expressed by savers, as industry research previously found that nearly three-quarters (70 per cent) of savers are apprehensive of investing in UK illiquid assets, including infrastructure and start-ups, due to concerns over risk and cost.

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