Productive Finance Task Force Releases Recommendations on Barriers to Investing in Less Liquid Assets

The Productive Finance Working Group is led by industry, co-chaired by the Governor of the Bank, the Managing Director of FCA and the Economic Secretary of HM Treasury.

Well managed, investments in such assets have the potential to generate better returns for investors, including those saving for retirement in defined contribution (DC) pension plans, given their generally investment horizons. long-term. These types of pension plans are an increasingly important vehicle for saving for retirement, as their assets have grown from around £ 200bn in 2012 to over £ 500bn today. , and are expected to double to £ 1 trillion by 2030.

Investing in productive financial assets can also benefit the economy as a whole by supporting the economic recovery from Covid, facilitating the transition to a net zero economy, and supporting financial stability. Greater investment in longer-term productive UK assets, such as research and development, technology and infrastructure, can boost long-term growth and support an innovative and greener future for the UK.

However, there are a number of obstacles and challenges to investing in less liquid assets and therefore these investments need to be carefully managed. The objective of the Group, meeting in November 2020, was to propose solutions to these obstacles, including a roadmap, a timetable and a set of actions.

In its report released today, “A Roadmap to Increase Productive Financial Investments”, the Group published four recommendations, underpinned by 13 specific actions, with an emphasis on supporting DC pension plans to invest. and develop the long-term asset fund (LTAF) structure.

The recommendations require action from industry and the public sector and will create an environment in which defined contribution plans and other investors can benefit from appropriate long-term opportunities. They understand:

  • Focus on long-term value: Defined contribution plan administrators, commercial organizations and consultants should consider how increasing investments in less liquid assets could generate greater long-term value for their members .

  • Building scale: The DC market has a high proportion of small projects. Their lack of scale can make it difficult for them to invest in less liquid assets for a variety of reasons.

  • A New Approach to Cash Management: Most defined contribution plans currently invest primarily in daily trading funds, which in theory means their holdings can be sold in the short term. Investing in less liquid assets does not present the same daily trading opportunity. Therefore, a wider range of defined contribution plans should find ways to allow them to invest in less liquid assets as part of a diversified portfolio. To support this, the Group recommends that the industry develop guidelines, in collaboration with the Bank and the FCA, on good liquidity management practices at the fund level.

  • Broaden investment in less liquid assets: the group recommended that the FCA consult on the modification of its rules for investing in illiquid assets through unit-linked funds and on the revision of the distribution rules of the LTAF to facilitate wider distribution to appropriate retail customers.

Chancellor of the Exchequer, Rishi Sunak, said:

Now is the time for institutional investors to seize the opportunity and invest in longer term UK assets. In doing so, they can help boost Britain’s long-term growth, enable retirement savers to access better returns and support an innovative and greener future for the UK.

So it’s great that the Industry Task Force has come up with proposals that will help overcome the barriers to investing in UK assets over the long term and I look forward to seeing them implemented.

Andrew Bailey, Governor of the Bank of England, said:

Addressing the investment barriers that exist for long-lived assets can help unlock valuable economic opportunities. Carefully managed, it is particularly important for those saving for retirement and for the economy in general. The contribution that the task force has provided over the past year in developing these recommendations is to be commended and it is essential that they be implemented.

Nikhil Rathi, Managing Director of the Financial Conduct Authority, said:

Defined contribution pension plans have grown in importance over the past 10 years, with more and more people using them to save for retirement. It is important to support access to different investment opportunities, which have the potential to provide more diversified returns to members as well as benefit the economy as a whole. The task force produced a bunch of recommendations that could make a real difference and my colleagues and I at FCA look forward to working with industry and others to ensure they are implemented.

Chris Cummings, Managing Director of the Investment Association, said:

Investing in illiquid assets is a way for savers to diversify their portfolios and at the same time provide capital for long-term projects that stimulate the economy. The long-term asset fund will provide defined contribution pension plans and certain retail investors with a new avenue to access illiquid investments through a fund structure designed specifically for such investments.

We welcome this report, in particular the work done by the Productive Finance Working Group to identify barriers for distributors offering funds with limited redemption possibilities and the commitment to closely examine the possibility of selling the LTAF to a wider range of retail investors with appropriate guarantees. . We look forward to working with policymakers, investment managers, distributors and other organizations to advance the report’s recommendations to make LTAF a success and increase the supply of productive finance in the world. British economy.

Michael Moore, Managing Director of BVCA, said:

The Productive Finance Working Group is an extremely important initiative. Not only does it encourage collaboration and the sharing of perspectives across the financial services industry, it also tackles the challenges facing certain types of investors who are currently excluded from the impressive returns of private equity funds. and venture capital.

BVCA welcomes its involvement in the group and the opportunity it has had to provide data and advice on investing in this sector. We believe the group’s recommendations can help defined contribution pension plans and other investors on the path to allocation to our asset class. We look forward to supporting the group’s ongoing workflows.

Ruston Smith, Chairman of the Tesco Pension Fund, said:

Many members of defined contribution plans tend to have long time horizons and, by providing good results for members, good quality illiquid assets can contribute to better diversification and future risk-adjusted net returns. Defined contribution schemes in other countries and defined benefit schemes in the UK have, for some time, included appropriate allocations to private markets as part of their objective of achieving good results for members.

Following the success of automatic enrollment, this initiative is extremely important to further improve the incentive and accessibility of good quality illiquid assets for UK defined contribution plans and their members. Further support from consultants and board training, in this important area, will help to make informed decisions and further develop DC investment strategies in the UK.

John J. Haley, CEO, Willis Towers Watson

Willis Towers Watson sees the report produced by the Productive Finance Working Group as a crucial step towards securing more illiquid and productive investments in defined contribution plans, thereby improving investment results for millions of defined contribution members UK ; We are proud to have actively participated in the project.

We recognize that there is still work to be done in this area, and we look forward to continuing our work with other stakeholders committed to further improving the UK DC market.

Chris Hill, CEO of Hargreaves Lansdown, said:

Over the past 18 months, many have reassessed their finances and started thinking about their future life plans, with many investing for the first time to build their financial resilience. We are all responsible for our own retirements, which is why Hargreaves Lansdown particularly welcomes the recognition of retail investor rights and their importance to the UK economy in the report.

When people have enough savings for emergencies and time to invest for the long term, they should have the ability to access these types of opportunities as part of their investment portfolio. Providing the right information to ensure investors knowledge and understanding of the risks of these new funds will be essential for their safe distribution.

More information :

  1. The final report, “A roadmap to increase productive financial investments” has been published.
  2. Further details on the Productive Finance Working Group, including minutes of their meetings, are available online.
  3. FCA CP21 / 12: A new fund regime authorized to invest in long-term assets is available online.

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