The Financial Conduct Authority's (FCA) Long-Term Asset Fund (LTAF) consultation has been welcomed by the pensions industry, although some have warned that further changes may be needed to address other barriers.

The consultation, which runs until 25 June 2021, is seeking views on plans to remove the 35 per cent cap on illiquid investments that can be held in workplace pension funds where a LTAF forms part of the default defined contribution arrangement.

Investment Association chief executive, Chris Cummings, welcomed the consultation, stating that the LTAF can offer a "significant additional way" for long-term investors to access illiquid investments with appropriate protections, building on the established investment fund model.

“We look forward to continuing to work with regulators and stakeholders to make the LTAF a success as part of the wider initiative to boost the supply of productive finance for the
UK economy," he continued.

Adding to this, Apex Group head of real estate advisory, Melville Rodrigues, highlighted the consultation – alongside the Chancellor’s commitment to legislate so the UK’s first LTAF will be up and running this year, as indication that the LTAF will be a “UK fund game-changer” within months.

He said: “The FCA usefully proposes amendments to the permitted link rules to enable pension schemes to consider the proportion of real estate and other illiquid assets across their investment portfolios.

“The amendments facilitate LTAFs being entitled strategically to commit into such assets.”

However, he noted that this strategy could be further enhanced if HM Treasury also addresses the current gap the UK fund offering, and legislates for an onshore closed-ended or hybrid Professional Investor Fund (PIF).

“HMT has helpfully consulted on the PIF, and – given extensive industry support for the PIF - should also legislate for the PIF on the same timeline as the LTAF,” he explained.

Aegon pensions director, Steven Cameron, added: “The government and FCA are clearly keen to find ways of breaking down barriers which currently discourage defined contribution (DC) pension schemes from investing in illiquid assets including infrastructure and other forms of productive finance.

"The latest consultation on a new form of LTAF, and its regulation, may address some of these barriers, in particular by giving trustees of DC schemes additional confidence in how they are being managed.

"However, as the CP touches on, this is not the only barrier to greater investment in illiquid assets without daily dealing."

In particular, Cameron explained that the operational infrastructure supporting both retail and workplace pension investments is geared to daily dealing, stating that a move away from this would require major and co-ordinated development.

“Perhaps more fundamentally, daily dealing on investments within DC schemes is currently regarded as standard," he added.

"While pension savings is long term, members expect to be able to switch funds, transfer between schemes, and from age 55, take retirement income without any delay or notice period.

"This cultural expectation will also need addressed unless DC schemes can find other ways to manage liquidity mismatches which doesn’t also result in additional risks for the member.”

Furthermore, Interactive Investor head of personal finance, Moira O’Neill, warned that while the proposals require open-ended funds to match the underlying liquidity of the assets in which they invest with the redemption terms that they offer to investors, there is no guarantee that this approach will be entirely successful when it comes to managing liquidity risks.

She continued: “We have to ask if open-ended funds want the right to invest in illiquid assets without the accompanying obligation to offer daily access to their own investors, what do investors get in return for that sacrifice?

“The fixation on open-ended funds when it comes to illiquid assets is bewildering. Investment trusts come with their own concerns, such as discount or premium issues. But they can be fully invested, and investors can buy or sell at the beat of their own drum, not someone else’s.”

In addition to this, she noted that the proposals look to limit distribution to professional investors and sophisticated private investors, or those who have taken advice.

She stated: “It is easily forgotten that many retail investors are the end beneficiaries of professional investors through pension providers, wealth managers and financial advisers.

“We would be interested to know how many people in frozen property funds were there because they took ‘advice.’ If the regulator is to push ahead with a LAPF, it must also protect consumers’ interests.

“Passing the buck onto sophisticated investors and advisers strikes the wrong chord.”

LEBC public policy director, Kay Ingram, also argued that whilst the long-term nature of pension saving theoretically lends itself to this type of fund, the FCA paper has made no mention of reform of the Lifetime Allowance, frozen until 2026 at £1,073,100.

“Without the scrapping of the LTA for DC savers, why should any pension scheme member embrace a higher risk of loss, with successful investment creating a tax surcharge?" she asked.

“If HM Treasury is serious about promoting this type of investment to pension scheme savers, then it must address the disincentive of the LTA, which condemns DC savers to a pension of less than the average wage on current annuity terms.”

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