The industry-led Productive Finance Working Group has published four recommendations for supporting DC pension schemes to invest and for developing the new long-term asset fund structure. 

 

The group set up by the Treasury, Bank of England and Financial Conduct Authority and consisting of industry heavy-weights, aims to get DC schemes to invest in illiquid assets like infrastructure and venture capital, has published its report titled, ‘A Roadmap for Increasing Productive Finance Investment’. 

 

The report makes four recommendations, including creating industry guidance on liquidity management at fund level; and for the FCA to consult on changing its rules for investment in illiquids via unit-linked funds and reviewing the LTAF distribution rules. 

 

Aside from these two, the group also recommends that industry should consider how less liquid assets could create value for members in the long term, and to build scale in the DC market. 

 

The group’s timeline shows it expects the recommendations to be fully implemented in the second quarter of next year. 

 

 

Chancellor of the exchequer, Rishi Sunak, welcomed the report and urged investor to act. “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,” he said. 

“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.” 

 

FCA chief executive Nikhil Rathi pointed out that DC schemes have become more important over the past 10 years as more people are now DC members. 

 

“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,” Rathi said. 

 

 

The pensions industry acknowledged that DC members could benefit from moving away from the focus on daily dealing. 

 

Ruston Smith, who chairs the Tesco Pension Fund and is part of the working group as an independent trustee – alongside Paul Trickett – said: “Many members in defined contribution schemes typically have long term time horizons and, in delivering good member outcomes, good quality illiquid assets can contribute towards improved diversification and future net risk adjusted returns.”  

 

He said other countries' DC schemes and UK DB schemes had for some time included appropriate allocations to private markets as part of their aim of delivering good member outcomes. 

 

“Following the success of automatic enrolment, this initiative is incredibly important to further improve the incentive and accessibility of good quality illiquid assets for UK defined contribution schemes and their members. Further support from consultants and on trustee education, in this important area, will help provide good, informed decisions and the further development of UK DC investment strategies.” 

 

The Pensions and Lifetime Savings Association also sits on the working group. Its chair, Richard Butcher, said the PLSA supports 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,” said Butcher. 

 

However, he cautioned that a blanket approach is difficult for a sector he said was not homogeneous. 

 

“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,” he stressed. 

 

The report sums up the position of the Department for Work and Pensions and the Pensions Regulator, which revolves around value for money. It states that the DWP has “taken several steps to enable investment in illiquid assets by DC schemes”: five new regulatory measures which will come into force on 1 October, including “to shift the focus in the DC market from costs to overall value for money”. 

 

 

   

 

 

What do you think about increasing DC investment in illiquid assets?

Ian Neale

Jerry Gandhi

Mike Clark