Date of meeting: 15 March 2022 | Virtual meeting
1. Competition law reminder by Simmons & Simmons LLP
2. Updates from the sub-groups and discussion
3. Updates from the official sector
Item 1 – Competition law reminder by Simmons & Simmons LLP
Simmons & Simmons LLP set out the legal obligations of all members of the Working Group relating to competition law.footnote  They reminded members that it is their responsibility to meet their legal obligations and to take their own legal advice.
Item 2 – Updates from the sub-groups and discussion
The chairs of the Technical Expert Group (TEG) footnote  welcomed the meeting participants and set the aims of the meeting – to discuss progress made by the sub-groups ahead of the Steering Committee meeting on 30 March 2022. These sub-groups cover five workstreams, focusing on value for money, actions by investment and employee-benefit consultants, performance fees, liquidity management, and raising awareness.footnote  The leads from each sub-group provided short summaries of progress for discussion, as follows.
Value for money: In the case of less liquid assets in the DC schemes’ default arrangements, the key challenge to shifting the focus from cost to value is the tension between the certainty of cost and uncertainty of future returns, making many focus primarily on keeping costs low. Less liquid assets tend to be more expensive and may take some time to generate value, and some of them may fail to do so. A key challenge for Trustees and other decision makers is how to ensure they act in the interests of members, while facing this tension between the certainty of cost and uncertainty of future return. Trustees, employers and other investment decision makers need transparent, robust and consistent value metrics. The proposed FCA-TPR Value for Money (VFM) framework, which is also consistent with DWP’s focus on value, can help to facilitate this. To support implementation of this framework, the sub-group is working on a guide, focusing on assessing value from less liquid assets specifically.
Investment and employee-benefit consultants: The Group is developing a proposal for investment and employee-benefit consultants to jointly make a public commitment to such a shift in their discussions with and advice to clients. The Group is also exploring how Trustees & employers could support this shift, e.g., by considering less liquid assets as part of the strategic asset allocation reviews, communicating with the members on the basis of value, challenging their consultants and providers, and exploring the synergies with the net zero transition and ESG agendas that have an inherently long-term focus.
Liquidity management: A guide will explore key liquidity management considerations from the perspective of DC decision makers, considering or already investing in less liquid assets. The guide will consider the impact of liquidity at three levels: the DC scheme member level, the strategy level (DC scheme wrapper), and the level of a fund that invests in less liquid assets.
Fees and T&C: The sub-group is working on a guide for Trustees / employers on performance fees, setting out what they are and the key considerations. There is a broad range of views on performance fees. The aim is not to sponsor or advocate the use of performance fees, but to move the debate forward by setting out potential approaches to adapting performance fees from a DC scheme’s perspective – to ensure they deliver value for money and fairness across cohorts of DC scheme members and overcome the operational challenges specific to DC schemes. The sub-group is also producing a guide on LTAF legal considerations and model LTAF constitutional documents, aimed at increasing understanding of LTAF as a new fund structure.
Raising awareness: this workstream aims at raising awareness of the key considerations around investment in less liquid assets among a broad range of market participants, by bringing together the outputs produced by the other TEG sub-groups. This workstream is working on a communications and rollout startegy, coordinated among the trade bodies and covering a range of formats including events and conferences, published materials, webinars, training sessions and teach-ins.
Discussion: TEG members were broadly supportive of the work of the sub-groups and thought it was important to ensure that these outputs have a tangible and lasting impact. It was noted that further thought is needed as to how best to package and present the materials produced by the TEG, to maximise their impact. There was also some discussion on whether it is helpful to sequence working through the barriers, and there was a broad agreement that it is important to work on all the barriers in parallel, given it is a multi-faceted issue and all stakeholders needed to play their part and there was a need to break away from a tendency to consider supply and demand separately. The tone of the documents would need to be carefully calibrated too, so that issues for consideration are presented in a neutral and objective way – road testing the material would be key to this.
Item 3 – Updates from the official sector
FCA presented on its work to review the classification of LTAFs as non-mainstream pooled investments and the possibility of appropriately managed distribution of LTAFs to retail clients and is planning to consult on this later in 2022. This will be done in a broader context of the recent HMT and FCA consultations on changes to the financial promotions regime and the classification of high-risk investments. The FCA is also taking forward the PFWG recommendation on permitted links.
FCA and TPR presented on their work on a value for money framework for all defined contribution FCA and TPR-regulated pension schemes, with an aim to support a shift in focus from cost to value. Once published, this framework could help reach the required common understanding of value by developing metrics and enabling comparisons of value between pension schemes. A joint feedback statement on the recent FCA / TPR discussion paper is expected later this year, to be followed by FCA / DWP consultations on a proposed framework. This is a complex, cross-industry piece of work which may require a phased approach.
DWP summarised their proposals, recently consulted on, to remove well-designed performance-based fees from the regulatory charge cap and provide appropriate accompanying mechanisms to ensure member interests remain protected. DWP has also continued its work on DC scheme consolidation and came to a view that the ongoing FCA / TPR work on value for money could be a more effective way forward to support consolidation. Government will soon be publishing a response to the recent charge cap consultation and the earlier call for evidence on DC scheme consolidation. More broadly, DWP will continue its support for enabling increased investment in less liquid assets and for removing the barriers to it.
See the list of the Working Group members.
Lee Foulger (Bank of England) and Nike Trost (FCA).
These are recommendations 1a-1d and 3a in the report (see p. 8-10). The other two recommendations for industry (2b and 3b) are addressed at industry at large. While some individual Productive Finance Working Group members have previously expressed interest in taking forward these actions, the TEG as a whole would not be an appropriate forum for this.