"LTAFs are a key stage in the critical path towards DC pensions investing more in illiquids."
The FCA has confirmed that it will be taking forward proposals to create a new type of open-ended authorised investment fund which will help support investment in assets like infrastructure and private equity. Investment in these assets has the potential to generate better returns for investors, including those saving for retirement in defined contribution (DC) pension schemes.
The FCA says that currently, some investors are unable, or unwilling, to invest in long-term assets, even though these assets could meet their investment goals.
The new rules create a Long-Term Asset Fund (LTAF) regime, a new FCA regulated fund that is designed specifically to help investment in assets including venture capital, private equity, private debt, real estate and infrastructure.
As investments in this type of fund may take longer to sell, the FCA has put in place rules to ensure there is a consistency between how long it will take to sell assets and how often and quickly an investor will be able to sell out of the fund.
The LTAF is aimed at DC pension schemes which may be interested in investing, in line with their investment horizons and risk appetite. It also offers long-term investment opportunities to sophisticated investors and some high-net-worth individuals.
The FCA will be consulting next year on the potential for widening the distribution of the LTAF to certain retail investors. While this would potentially open a controlled route for retail investors to higher risk assets than some of the other routes currently available such as unauthorised funds, safeguards would also be needed to ensure retail investors understand the risks involved.
Nikhil Rathi, chief executive of the FCA, said: "We are supporting fresh collaborative thinking designed to improve the effectiveness of UK markets while protecting standards. If this innovative fund structure, created by our rules, is taken up by the asset management industry, it may provide alternative routes to returns for investors, while supporting economic growth and the transition to a low carbon economy."
Steven Cameron, pensions director at Aegon, commented: “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.”
