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UK workplace Defined Contribution (DC) pension schemes are an increasingly important vehicle for savings retirement. Ten years since the launch of automatic enrolment in 2012, there are 18 million active savers in UK workplace DC schemes. Over this period, their assets have increased from around £200bn to over £500bn and are expected to double to £1tn by 2030.

The IA has been keen to ensure that DC schemes have access to a wide range of investment opportunities to ensure members of these schemes have the best possible chance of reaching their retirement savings goals. Currently, UK schemes invest relatively little in less liquid assets, such as private equity, private credit, infrastructure venture capital and real estate. Making a partial allocation to these less liquid assets classes as part of a broader, liquid portfolio (ie that includes listed shares and bonds) can help to diversify the investment portfolio and provide the opportunity for the better long-term performance (although this is never guaranteed). The IA's UK Fund Regime Working Group identified a gap in the UK regulatory framework for investment funds that could allow DC schemes to access less-liquid investments, and proposed the Long-Term Asset Fund (LTAF) as a potential solution in its 2019 report. The IA published a further position paper in 2020 outlining how the LTAF could be structured, the strategies that could be included in the LTAF and how investors could access this. 

Reflecting the importance of this issue, the Productive Finance Working Group was established to develop practical solutions to the barriers to investment in less liquid assets. The IA participated in the Group, alongside a number of other organisations. The Group has identified the barriers faced by the DC pension schemes as the main areas of focus. In 2021 the Group published a report, setting out the key issues and recommendations for industry and the official sector that could create an environment in which DC schemes and other investors could benefit from investment in long-term, less liquid assets, where appropriate. One of the Group's early deliverables was also to consider what is required to ensure the LTAF is operationally, commercially and legally viable, alongside other existing structures. 

In response to the recommendations in that report, the Group has been taking concrete steps to remove barriers and raise awareness of the key considerations around investment in less liquid assets and to give decision makers the necessary tools to consider investing in such assets, when in members' interests. To facilitate this, the Group has produced this series of guides for trustees, employers and other key DC scheme decision makers, covering key issues around investment in less liquid assets within default arrangements, including: 

Value for money: To help shift the focus from minimising cost to a more holistic value assessment, this guide outlines a process for assessing value for members from investing in less liquid assets and provides case studies on how that could work in practice for different types of DC schemes. 

Performance fees: To help DC schemes select, negotiate and co-create performance fee structures that could meet their members' needs, the guide sets out key principles and maps them to specific features of performance fees to high their implications for DC schemes. 

Liquidity management: To support robust liquidity management and give DC scheme decision makers the necessary tools, the guide outlines how DC schemes can meet the needs of their members, while investing in less liquid assets, by managing liquidity at two levels - the DC scheme and underlying fund levels. 

Fund structures for less liquid assets: To help DC schemes select a route for investing in less liquid assets that meets their specific needs, the guide provides an overview of the key features and considerations around the fund structures potentially available to UK DC schemes.

Legal guide to the Long Term Asset Fund (LTAF): To help DC scheme decision makers become more familiar with the LTAF as a new fund structure, the guide highlights the key features of the LTAF, including its legal structure and a summary of the key terms. The Group has also been producing model constitutional documents for the LTAF, beginning with the version for an ICVC, published alongside the LTAF legal guide. The other versions, for an ACS and AUT are currently being finalised and will be published soon.

Due diligence: To facilitate high standards around investment in less liquid assets, this guide highlights the key considerations around due diligence on the investment managers and products. 

To support implementation in practice, investment and employee-benefit consultants have published a joint commitment to shift the focus from cost to value when advising DC decision-makers, and an accompanying list of considerations for consultants on how to incorporate less liquid assets successfully in client solutions, when appropriate. Consultants have also issued a call to action for DC investment platforms to evolve their processes and systems to support investment in less liquid assets, and will engage with platforms, as appropriate, to set out the business case for such investment.

The guide and model documents are available on the links below: 

PFWG Guides – Investing in Less Liquid Assets

Model Instrument of Incorporation for LTAF ICVCs

The FCA has also published a webpage setting out the rules and guidance that apply to LTAFs around valuation and pricing. This aims to help trustees and other potential investors in LTAFs understand the basis on which LTAFs are priced.

The IA's focus will be on supporting its members on the implementation of LTAFs, and continuing to work with HM Government, the FCA, the Bank of England and other associations to ensure the LTAF framework can achieve its aim of increasing the access of DC schemes and other investors to less liquid investments.