Minutes of the Productive Finance Working Group - March 2021

The second technical expert group (TEG) meeting
Published on 30 April 2021

Date of meeting: 23 March 2021 | Virtual meeting


1. Competition law reminder by Simmons & Simmons LLP

2. Updates on and discussion of progress since the previous TEG meeting on solutions to the barriers to investment in less liquid assets

3. Agreeing next steps for delivering draft solutions for the second meeting of the Steering Committee (SC2) on 4 May


Item 1 – Competition law reminder by Simmons & Simmons LLP

  1. Simmons & Simmons LLP set out the legal obligations of all members of the Working Group relating to competition law. They reminded members that it is their responsibility to meet their legal obligations and to take their own legal advice.

Item 2 - Updates on and discussion of progress since the previous TEG meeting on solutions to the barriers to investment in less liquid assets

  1. The co-chairsfootnote [1] of the Technical Expert Group (TEG) opened up the meeting by thanking members again for their participation in the Working Group and the progress made since the previous meeting. They invited the chairs of the three sub-groups – each focussed on one of the three broad sets of barriers agreed at the previous TEG meeting: barriers to creating the Long-Term Asset Fund (LTAF); distributing the LTAF; and enabling greater demand for less liquid assets, respectively – to give an update on their progress since the previous meeting.
  2. The chair of the first sub-groupfootnote [2] outlined the group’s initial thinking on identifying solutions to the barriers that exist for the creation of an LTAF structure that is both commercially and legally viable.
  3. In terms of target investors, the sub-group had agreed to prioritise solutions for institutional investors such as Defined Contribution (DC) pension schemes – though allowing sufficient flexibility so as not to preclude the possibility to consider retail investors in the future – and were focussing on three questions:
    1. What are the key design features and regulatory framework needed to allow DC investors to invest directly in less liquid productive finance assets? At a high level, the sub-group’s initial view was that the fund structure should be based on existing authorised fund frameworks, but that they should be more aligned to the key design features that would make them more attractive to DC pension scheme investors.
    2. To what extent do Permitted Link rules prevent investments in long-term assets and what would be required to set the LTAF up for success? The group’s initial thoughts on this were that: it was important to maintain all supplementary investor protection requirements; the LTAF should be designated as a permitted link in its own right; and either a 35%-50% illiquid asset limit should be applied at the portfolio level or the LTAF should be exempt from such a limit, as is the case for property.
    3. To what extent do distribution and disclosure requirements enable or inhibit distribution to DC investors? The group’s initial high level view was that the less liquid nature of the fund and underlying assets would need to be appropriately reflected in the disclosure and distribution rules.
  4. The aim of the sub-group was to propose a blueprint for the design of the LTAF along five key dimensions:
    1. Structure and liquidity of the fund. Key considerations here were: a principles-based requirement to align the liquidity obligations to the underlying liquidity of the asset base (the fund would not be suitable for daily dealing); avoiding prescription in regulations where possible; the need for clear disclosure of liquidity rights to help manage investor expectations; the importance of long notice periods; and the need to avoid fire sales.
    2. Eligible assets. Key considerations here were: to allow for a broad range of private asset classes; the need for the fund strategy to be clear and unambiguous in reflecting the long-term nature of the fund; the importance of diversification to both UK and non-UK assets; the need for some liquid assets to aid liquidity management, but not compromise the long-term nature of fund; and the ability for the LTAF to issue debt being reviewed.
    3. Leverage. Key considerations here were: leverage at both the asset and fund level; and the need for acceptable gearing parameters.
    4. Pricing and valuations. Key considerations here were: to allow flexibility on the frequency and methodology, to accommodate different asset classes, investment strategies and commercial arrangements; a minimum valuation frequency of annually would be appropriate; to ensure fairness and objectivity by drawing on the rules for Non-UCIT Retail Schemes (NURS), Qualified Investor Schemes (QIS) and/or Alternative Investment Fund Managers Directive (AIFMD) rules – it should be the manager’s responsibility to select the appropriate mechanisms and methodology.
    5. Concentration. The sub-group’s initial thinking was that, apart from a small number of exceptions, the concentration rules for the LTAF should be based on existing NURS rules – on the understanding that the LTAF would be a regulated scheme.
  5. The next steps for this sub-group ahead of SC2 were to refine this blueprint and get views from the rest of the TEG and other stakeholders.
  6. The chair of the second sub-groupfootnote [3] outlined the group’s initial thinking on identifying solutions to address the operational barriers to the distribution of non-daily dealing funds, including the LTAF. As with the first sub-group, they had agreed to prioritise the removal of barriers for DC default schemes to invest in non-daily dealing funds, such as the LTAF.
  7. Work to date had focussed on:
    1. Identifying the distribution channels through which DC schemes currently invest – for example: DC Trust Default schemes; Master Trust Default schemes; Contract Based Workplace Default schemes; and Non-Workplace Multi-Asset schemes.
    2. Understanding the challenges that non-daily dealing funds pose to those distribution channels in the current operating environment.
    3. Developing initial solutions to the identified issues for validation through external engagement.
    4. Considering potential changes to the operating environment in which DC schemes operate and the impact this could have on schemes exposed to non-daily dealing funds.
  8. The sub-group had identified a dozen or so potential barriers and issues that it would seek to address. These included:
    1. Given the long-term nature of the LTAF, liquidity would predominantly need to be managed at the default scheme level. To help facilitate this, the sub-group would develop a set of scenarios to understand how liquidity management might be undertaken at scheme level for different events for various LTAF dealing frequencies.
    2. Daily valuation/price feeds – and, in particular, where a valuation of an LTAF is being carried out monthly, how would a daily ‘stale’/adjusted price be processed? Default managers would need to be comfortable with the methodology.
    3. How would schemes conduct a bulk transfer out when they have a holding in an LTAF that deals infrequently (for example, annually)? And is there a need to require notice to be served before transferring out? The sub-group would explore if requiring a notice period before a bulk transfer can commence would be appropriate and whether in-specie transfers could be appropriate in certain circumstances (eg into bespoke default arrangements)?
    4. Consumer understanding and Terms and Conditions – for example, what information would need to be shared with members ahead of, and following, exposure to less liquid assets within a default scheme and whether existing contracts would need to be amended?
    5. The potential for the default scheme to suspend dealing. This could be an issue in extreme situations, for example big withdrawals combined with a high illiquid allocation. The sub-group would consider what additional operational and consumer considerations would need to be taken into account to guard against such risks.
  9. The next steps for this sub-group ahead of SC2 were to develop solutions to the barriers and issues it had identified for each distribution channel. To help do this, the sub-group would discuss these issues with a range of stakeholders, for example: employee benefit consultants and investment consultants; pensions platforms; trade association forums; and retail advisors and platforms. Based on these, the sub-group would consider potential changes to the operating environment DC schemes face and the impact these could have on schemes invested into non-daily dealing funds.
  10. The chair of the third sub-groupfootnote [4] outlined the group’s initial thinking on how to enable greater demand for less liquid assets. Given the other sub-groups’ decision to prioritise DC schemes, the aim of the third sub-group was to identify practical steps to help DC schemes to get a greater understanding of the impact of investing more in less liquid assets on their fiduciary responsibility.
  11. The sub-group was focussing on the three barriers identified by the SC:
    1. Fiduciary responsibility – how can DC schemes give greater consideration to long-term investment returns as part of their consideration of value for their members? The sub-group had come up with some initial questions and ideas, which it would consider further, for example:
      1. What changes to default arrangement guidance might help to achieve better outcomes?
      2. whether government and regulatory stakeholders could make clear and unambiguous statements that less liquid allocations made in an appropriate way are consistent with their view of DC best practice.
      3. whether greater visibility on the approaches taken by Master Trusts and large corporate plans could be provided as examples of investing more in less liquid assets (subject to other commercial constraints).
      4. What myth-busting could be done around the true risks in implementing a less liquid allocation? A broad but user-friendly framework to help Trustees incorporate the various aspects of investing in less liquid assets could potentially be very helpful in making them more comfortable with such investments.
    2. Cost vs value – what might change more broadly to make DC schemes place greater focus on the value they are delivering for members rather than annual cost? Can greater consideration be given to the real world impact some members would like their investments to have? How can the challenges that performance fees pose to DC schemes be overcome? Key questions/considerations here were:
      1. It would be important to set out the rationale for investing in private markets – worked examples could be helpful to provide reassurance for pension schemes.
      2. How could the focus of the industry and trustees to shifted more towards value for members in terms of higher retirement income and less on lower fees?
    3. DC scheme liquidity management – what might change in order to give pension schemes the comfort that investing in productive finance assets isn’t going to be problematic for liquidity management? To what extent should consideration be given to adjusting the approach DC schemes take to liquidity management? The sub-group had come up with some initial questions and ideas, which it would consider further, for example:
      1. What changes to default arrangement rules might help here?
      2. A key question was the extent to which liquidity would be managed at the LTAF level or the scheme level? In the latter case, what tools could be developed to help pension schemes better manage their liquidity needs?
      3. Worked examples and scenarios on liquidity management could help to reassure trustees about greater investment in less liquid assets. These could form a blueprint for managing liquidity, valuations and pricing.
  12. Based on the above, the next steps for this sub-group ahead of SC2 were to develop solutions to the barriers the SC had identified. To help do this, the sub-group would discuss these issues with a range of stakeholders, for example: trustees of DC pension schemes; in-house Chief Investment Officers; investment consultants; providers; legal firms; consultancies and think tanks.
  13. The chairs of the TEG thanked the sub-group chairs for their updates and the groups for their work. They then invited comments and reactions from TEG members. The main points of discussion were:
    1. Most members supported the prioritisation on DC schemes, while not precluding sophisticated retail investors in the future, as long as the appropriate consumer protection was put in place. Time permitting, the Working Group could set out a roadmap to extend the LTAF to retail investors in the future. The prioritisation of DC schemes reflected: the short lifespan of the Working Group; significant operational hurdles to a non-daily dealing fund in the retail market; questions around how to appropriately market alternative asset classes to a broader audience; and DC schemes being the largest potential pool of capital for productive investment, whilst facing the greatest existing barriers to investment. Some members, however, favoured considering retail investors as well as DC schemes to help the LTAF achieve scale and maximise the chances of a successful roll-out and larger initial take-up. The TEG agreed to ask the SC for a steer on this at the next SC meeting on 4 May.
    2. There was broad agreement on the key features of the design of the LTAF that had been set out, in particular on removing liquidity mismatch and allowing for a broad range of less liquid assets by type, sector and jurisdiction. Some members, however, felt that there should be a focus more narrowly on UK assets, for example, to support financing for UK infrastructure and green projects. It was also noted that investment in overseas assets was often more costly and complex. The TEG agreed to ask the SC for its view at the next SC meeting.
    3. There was discussion of whether liquidity would need to be managed at the LTAF or the scheme level. Most members felt that, liquidity would increasingly need to be managed at the scheme level and that it was important both to reassure pension schemes about the true nature of the liquidity risks they face and how they might be protected in adverse circumstances and propose ways to help them better manage their liquidity. It was agreed developing a robust approach to liquidity management should be a priority ahead of the next SC meeting.
    4. Several members supported the suggestion that it would be helpful for government and regulators to signal that greater investment in less liquid assets made in an appropriate way are consistent with their view of DC best practice.

Item 3 - Agreeing next steps for delivering draft solutions for the second meeting of the Steering Committee (SC2) on 4 May

  1. The Secretariat outlined the expected deliverables and the timelines for the next TEG meeting on 20 April and SC meeting on 4 May. The aim was to produce a short paper for the SC meeting setting out the TEG’s proposed practical solutions to the barriers the SC had identified and asking for the SC’s sign-off and steers on them, as appropriate. A draft of this paper would be the main focus of the next TEG meeting ahead of circulating to the SC.



Nike Trost

Financial Conduct Authority

Lee Foulger

Bank of England

Private sector attendees

Ross Hayter

Aberdeen Standard Investments

Nicholas Smith

Alternative Investment Management Association (AIMA)

Callum Tanner

Association of British Insurers (ABI)

Guy Rainbird

Association of Investment Companies (AIC)

Ashish Dafria


Jane Sloan


Rachel Turner

BNY Mellon

Tom Taylor

British Private Equity and Venture Capital Association (BVCA)

Andrew McCaffery


Nathan Long
Mona Christensen

Hargreaves Lansdown

Hargreaves Lansdown

James Chew


Chris Dodwell

Impax Asset Management

Jonathan Lipkin

Investment Association (IA)

Laura Mason

Legal & General

Dr Darko Hajdukovic

London Stock Exchange Group

Arthur Rakowski

Macquarie Asset Management

Stephen O’Neill


Christopher Davies

Partners Group

Karen Hurst

Pensions & Lifetime Savings Association (PLSA)

David Land (alternate for Prateek Sharma)

Rothesay Life

Neil Simmonds

Simmons & Simmons LLP

Emma Reynolds (alternate for Adam Wendelboe)

TheCityUK (TCUK)

Naomi Clark

Universities Superannuation Scheme

Duncan Hale

Willis Towers Watson

Anthony Ellis

Hymans Robertson

Mark Walker

Coal Pension Scheme


James Howat

Bank of England

Iren Levina

Bank of England

Alan Mankikar

Bank of England

Tom Bramhill

Financial Conduct Authority

Official sector attendees

Sophie Stone

Bank of England

Leo Fernandes

Alina Barnett

Sarah O’Sullivan

Dooho Shin

Bank of England

Bank of England

Bank of England

Bank of England

Sadie Lambie

Her Majesty's Treasury

Fraser MacLeod

Her Majesty's Treasury

Rachel Mumford

Her Majesty's Treasury

Mhairi Jackson

Financial Conduct Authority

Michael Collins

Financial Conduct Authority

Andrew Blair

Department for Work and Pensions

Brendan Walshe

The Pensions Regulator

  1. Nike Trost (Head of Pensions and Funds, Financial Conduct Authority) and Lee Foulger (Director, Financial Stability Strategy and Risk, Bank of England).

  2. Ross Hayter (Aberdeen Standard Investments).

  3. Nathan Long (Hargreaves Lansdown).

  4. Gaurav Lal (Fidelity).

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