Neil Simmonds is a partner at Simmons & Simmons. He was a member of PFWG’s technical experts group and co-chaired the sub-group on performance fees and legal terms
The rate of change in the defined contribution (DC) pension industry since the launch of auto-enrolment in 2012 has been remarkable, if not a little hard to keep up with. The assets of DC pension schemes have increased by around 150% and look to double again to over £1trn by the end of the decade.
However, it is not only the size of these schemes which has increased. The expectation placed on DC pension trustees to deliver consistent and favourable returns for their members' retirement in the face of market volatility and generally slow economic growth has led to much so-called "thinking outside of the box" when it comes to asset allocation, value for money and general risk appetite.
In particular, there has been a recent and concerted push for DC pension schemes to broaden their exposure to less liquid assets. There is no doubt that, whilst the benefits of doing so are broadly accepted, making investments into such assets represents a minor foray into the unknown for many UK DC pension schemes (unlike for defined benefit and foreign DC pension schemes, where allocation to private assets is fairly well established) and successful implementation requires careful industry-wide consideration of the potential barriers that DC pension trustees face in doing so.
In this context the Productive Finance Working Group's guides to investing In less liquid assets, which provide a series of guides for trustees, employers and other DC scheme decision makers around key topics arising when considering investment in less liquid assets, will be welcomed by the industry.
The guides address a number of the critical path issues which those involved in running DC pension schemes will face whilst investing in less liquid assets, including:
- the assessment and prioritisation of value;
- the selection, negotiation and co-creation of performance fees which meet members' needs;
- the development and maintenance of robust liquidity management; and
- conducting proper due diligence on the investment managers and products in the market.
The guides also include an explanation of the different fund structures available to UK DC schemes offering exposure to less liquid assets, including a legal guide to long-term asset funds (LTAF).
Although we advised on the first submission to the Financial Conduct Authority in November and expect more launches to follow, the relatively slow uptake of the LTAF, which has been available to launch since November 2021, is representative of the hesitancy that has been displayed by the industry in pushing ahead with investing in less liquid assets.
A particular sticking point has been striking the balance between, on the one hand, continuing to provide cost efficiency to members of DC pension schemes and, on the other hand, delivering long-term value via investment in less liquid assets to improve the potential return earned on member savings.
Therefore, it is also a welcome development that the guides include a joint commitment from a number of investment and employee-benefit consultants to shift the focus from cost to value when advising DC decision-makers. 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, which should aide implementation in practice.
In our view, the comprehensive guides address many of the concerns that DC decision makers may have whilst considering whether (and how) to invest in products holding less liquid assets as part of their portfolios. We expect the guides will instil greater confidence in the industry on the subject and, as a result, should lead to more products offering such investment opportunities (such as LTAF vehicles) appearing on the market in the coming months.
Neil Simmonds is a partner at Simmons & Simmons
Simmons & Simmons is the sole legal member of the PFWG. Simmonds was a member of PFWG's technical experts group and co-chaired the sub-group on performance fees and legal terms which also produced model constitutional documents for the LTAF, the first of these, the version for an investment company with variable capital (ICVC) having been published alongside the LTAF legal guide.
