Steven Cameron, Aegon’s Pensions Director comments: “We welcome the FCA’s new regulatory regime for Long Term Asset Funds (LTAF) as a means of offering defined contribution pension schemes a new route towards greater investment in long term illiquid assets. This is at the heart of the ‘investment big bang’ where the Prime Minister and Chancellor are keen to encourage pension schemes to allocate more of their funds to long term illiquid assets including infrastructure projects and ‘productive finance’ in their important drive to build Britain back better and greener. The hope is such investments will also deliver better returns for the benefit of pension scheme members.
“LTAFs are a key stage in the critical path towards DC pensions investing more in illiquids. Trustees and scheme managers may choose this approach to access illiquid investments, investing a small proportion of scheme default funds in these, rather than in individual long term projects. This will allow them to achieve greater diversification and a spreading of risk within this form of investment while also drawing on the expertise of the LTAF manager in this specialist area.
“However, it’s unlikely we’ll see an overnight ‘big bang’ rush. Members of DC pension schemes now fully expect their pension funds to be priced daily and to be able to switch funds, transfer between schemes or from age 55 access their pensions flexibly, all without any delay or notice period. 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.”
Callum Stewart, Head of DC Investment, Hymans Robertson, says: “We are supportive of the FCA’s proposals to extend the range of vehicles for pension schemes to access long-term investments such as illiquids. In particular, we agree with the proposal to remove the upper limit on exposure to illiquid investments for LTAFs, which addresses one of the current constraints with existing fund types that has limited innovation. Although not required, we also share the FCA’s positive view on work carried out by the Cost Transparency Initiative and that this should be used in the context of LTAFs where at all possible. As always, however, 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.”
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