DC schemes encouraged to consider long-term value of illiquid investments

The Productive Finance Working Group has outlined a series of recommendations to facilitate greater investment in longer-term, less liquid assets by defined contribution (DC) pension schemes, urging trustees to shift their focus to long-term value.

The industry-led group, which is co-chaired by Bank of England (BoE) governor, Andrew Bailey, Financial Conduct Authority (FCA) chief executive, Nikhil Rathi, and Economic Secretary to the Treasury, John Glen, has identified a number of barriers facing the DC market in terms of less liquid investments.

It outlined four recommendations in response to these challenges, each underpinned by 13 specific actions, with a focus on supporting DC pension schemes to invest and developing the long-term asset fund (LTAF) structure.

Shifting focus to long-term value was highlighted as a key recommendation, with DC scheme trustees, trade bodies and consultants urged to consider how increasing investment in less liquid assets could generate greater long-term value for their members.

In particular, the group noted that the charge cap plays an “important role” in protecting pension scheme members, but can also risk contributing to a focus on cost over value.

Given this, it recommended that the Department for Work and Pensions (DWP) continues to monitor the overall impact of the charge cap, and how to reconcile performance remuneration and the charge cap rules.

However, the group warned that shifting the focus from cost to value and making an impact is “only possible through collective action”, therefore urging the DWP and The Pensions Regulator to consider ways to proactively communicate their supportive messaging on investment in less liquid assets.

The report also recommended that that the DWP continues with a DC scheme consolidation agenda, where it is clear that schemes are not providing value for members, in order to address the “long tail of smaller DC schemes”, which have presented a further scale barrier to less liquid investments.

The potential for a new approach to liquidity management was also raised in light of concerns that investment in less liquid assets does not present the same daily dealing opportunity DC schemes are accustomed to, with DC schemes encouraged to find ways to enable them to invest in less liquid assets as part of a diversified portfolio.

In line with this, the group has recommended that the industry develop guidance, in collaboration with the BoE and FCA, on good practices for liquidity management at a fund level.

The group also recommended that the FCA consults on changing its rules for investment in illiquid assets through unit-linked funds and reviewing the LTAF distribution rules to facilitate wider distribution to appropriate retail clients.

Commenting on the report, Chancellor, Rishi Sunak, said: “Now is the time for institutional investors to seize the moment and invest in longer-term UK assets. By doing so they can help boost Britain’s long term growth, enable pensions savers to access better returns, and support an innovative, greener future for the UK.

“So it’s great that the industry working group have put forward proposals that will help to overcome the barriers to investing in long-term UK assets and I look forward to seeing them put into action.”

Rathi also emphasised the increased importance of DC pension schemes over the past 10 years, noting that there are “increasing numbers of people using them to save for their retirement”.

“Supporting access to different investment opportunities, which have the possibility to provide more diversified returns to members as well as benefiting the wider economy, is important,” he continued.

“The working group produced a group of recommendations that could really make the difference and my colleagues and I at the FCA look forward to working with the industry and others to ensure they are implemented."

Adding to this, Bailey said: “Addressing the investment barriers which exist for long-term assets can help unlock valuable economic opportunities.

"Carefully managed, this is especially important for people saving in their retirement and the broader economy.

"The input that the working group has provided over the past year in coming up with these recommendations should be commended and it is vital that they are implemented.”

Also commenting on the recommendations, Pensions Minister, Guy Opperman, added: “I welcome this report from our Productive Finance Working Group which explores how best to open up illiquid assets to DC 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.”

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