On 27 September 2021, the Productive Finance Working Group (Working Group) published a report, A Roadmap for Increasing Productive Finance Investment. The report contains four recommendations, underpinned by 13 specific actions, with a focus on supporting Defined Contribution (DC) pensions schemes to invest and developing the long-term asset fund (LTAF) structure.
The Working Group is industry led, co-chaired by the Governor of the Bank of England (BoE), the Chief Executive of the FCA, and the Economic Secretary to HM Treasury. The Working Group publishes recommendations addressing the barriers to investment in less liquid assets.
The recommendations in the Working Group’s report includes:
- Shifting the focus to long-term value: DC schemes trustees, trade bodies and consultants should consider how increasing investment in less liquid assets could generate greater long-term value for their members.
- Building scale: The DC market has a high proportion of small schemes. Their lack of scale can make it challenging for them to invest in less liquid assets for a variety of reasons.
- A new approach to liquidity management: Most DC schemes currently invest predominantly in daily-dealing funds which in theory means their holdings can be sold at short notice. Investment in less liquid assets does not present the same daily dealing opportunity. Therefore a broader range of DC schemes should find ways to enable them to invest in less liquid assets as part of a diversified portfolio. To support that, the Working Group recommends industry develop guidance, in collaboration with the BoE and FCA, on good practices for liquidity management at a fund level.
- Widening investment in less liquid assets: The Working Group recommended that the FCA consult 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.
In terms of next steps, the report states that industry members of the Working Group and the official sector have committed to moving forward the proposed recommendations. It adds that 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. This will also require broader action across the industry, not just the Working Group members.
The Working Group will meet in early 2022 to monitor the progress in implementing these solutions and consider any further action.