The publication of the Productive Finance Group’s

A roadmap for increasing productive finance investment

paves the way for Long Term Asset Funds to be integrated in the default investment strategies of our major workplace pensions. Clearly the Government has got the message that it is here, rather than in DB schemes or wealth management , that most change can be achieved. When we consider the growth in assets (almost all of which could be considered “long-term”) this is not surprising.

At a high level this states a change in the Government’s intention

to shift the focus in the DC market from costs
to overall value for money. At present, schemes are only
required to publish the costs and charges associated with
their various funds but from 1 October 2021, schemes
must also publish net returns. The government believes
that investment returns, which can vary significantly more than charges, are a far greater determinant of member outcomes. We hope that this will drive competition on the basis of overall value.

This is in line with the FCA and tPR’s recent discussion paper on value for money and reinforces the intent of the DWP improve value for members.

And the paper reinforces the intent of Big Government to drive scale through consolidation, specifically of smaller occupational DC pension schemes into consolidating schemes (aka master trusts).

This much is just a restatement of what has been said already , what is new are the two final sections of the paper which deal with introduce a new approach to liquidity management and proposals to widen investment in less liquid investment classes. This is going to require not just the integration of LTAFs into existing fund structures but changes in the permitted links rules for unit linked funds.

To ensure consistency in the application of the permitted
links rules and more comprehensively remove barriers
to productive finance assets, we recommend removing
the 35% cap for all permitted links, where the underlying
investor is not self-selecting their investments, i.e.
permitting the distribution of illiquid assets beyond DC
default pension products to other managed portfolios
created by the provider. This covers a broader range of
long-term savings products that contain pre-packaged
investment strategies that are professionally selected and
where liquidity risk is carefully considered and managed.

As I read this , the Government is carving out the default funds of large workplace pensions so that they can invest in Long Term Asset Funds well beyond the prescribed limits today.

Since the maximum allocation to illiquids under consideration from schemes such as Nest appears to be set around 20%, permitting allocations of twice that suggests that Government is thinking of a wholesale move from public to private markets.

The paper pays considerable attention as to how liquid DC strategies need to be and how best illiquidity can be managed. The implication is that Government is expecting substantial changes in how large schemes are invested, beyond the allocations being considered today.

There is likely to be considerable push-back over this from pension funds and asset and fund managers. The FT reported on the morning of publication of the Productive Finance paper – and it’s author – Jo Cumbo has already tweeted her views on notable omissions.

There are NO recommendations in this report for managers to reform their performance fees. Instead DC schemes and trustees are encouraged to “work together” to consider “appropriate” methodologies to accommodate performance fees within a charge cap. https://t.co/t3VZby5tbG

— Josephine Cumbo (@JosephineCumbo) September 27, 2021

No doubt there will be some rigorous discussions on how managers of LTAFs intend to be paid and what the tolerance of trustees will be to the carry of performance related fees.

More fundamentally , figures as authoritative as Chris Sier have made known their fundamental objection to illiquids being included in DC pensions. It is far from clear how platforms (still bruised from Woodford) will embrace the operational risks of illiquidity and the more fundamental risk that they may not thoroughly understand the risks of the underlying investments.

The timeframes for these changes to be implemented is short and we can expect the debate to intensify over the coming months