Minutes of the Productive Finance Working Group - 30 March 2022

Minutes of the Steering Committee meeting of the Productive Finance Working Group
Published on 02 May 2023

30 March 2022 | Virtual meeting


  1. Competition law reminder by Simmons & Simmons LLP
  2. Chairs’ opening remarks
  3. Discussion of the 2022 work programme
  4. Chairs’ closing remarks including next steps


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 [1] They reminded members that it is their responsibility to meet their legal obligations and to take their own legal advice.

Item 2 – Chairs’ opening remarks

Nikhil Rathi welcomed the meeting participants and set the objectives for the meeting – to discuss the 2022 work programme, with an aim to take forward the recommendations in the Group’s 2021 report, and agree next steps.

The co-chairs of the Steering Committeefootnote [2] thanked the members of the Steering Committee and the Technical Expert Group (TEG) for their work and emphasised its importance. Appropriately managed, investment in less liquid assets could benefit DC pension scheme members and the broader economy.

Item 3 – Discussion of the 2022 work programme

To build on steps taken by the official sector and support a significant and lasting shift across the ecosystem involving employers, trustees, consultants, platforms and fund managers, the TEG has been actively working to take forward the recommendations from the report addressed at industry. The TEG is working to raise awareness of the key considerations around investment in less liquid assets, and to give Trustees, employers and other key Defined Contribution (DC) scheme decision makers tools to consider investing in such assets, when appropriate.

This part of the meeting focused on three issues, introduced by the TEG co-chairsfootnote [3] and the chairs of the relevant TEG workstreams, and followed by a discussion by the Steering Committee:

  • shifting focus from cost to value for DC scheme members
  • adapting approaches to performance fees to meet DC schemes’ needs
  • driving operational implementation

Shifting focus from cost to value for DC scheme members

The TEG introduced the first issue, reminding participants that one of the recommendations in the PFWG 2021 report was to shift the focus from cost to long-term value for DC pension scheme members.

To help address this, the PFWG is working on several outputs aimed at giving trustees, employers, and other key decision makers greater confidence and tools for investing in less liquid assets, when appropriate. 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 TEG is working on a guide, focusing on assessing value from less liquid assets specifically.

The Group is also considering how to shift the focus across the chain and 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 facilitate 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.

The Steering Committee members raised a number of points in discussion, including whether the FCA/TPR work is proceeding quickly enough, the importance of both the buy and the sell sides in changing the current dynamics, the importance of appropriate approaches to performance fees to meet the needs of DC schemes, the need for providers and investment consultants to focus more on the investment proposition when pitching for business (rather than on price or administration), the focus that employers (as the ultimate decision makers in many cases) have on cost, the importance of considering future expected returns rather than past returns, and the lesson from the defined benefit world that any changes will take significant time to implement.

Adapting approaches to performance fees to meet DC schemes’ needs

The TEG introduced the second issue, noting that it was important that performance fees can be made to work in the interests of pension scheme members. DWP staff, attending the meeting as observers, outlined their work on performance fees and the charge cap.

DWP has recently consulted on proposals to remove ‘well-designed’ performance-based fees from the regulatory charge cap and provide appropriate accompanying mechanisms to ensure member interests remain protected.

Regardless of the outcome of this consultation, it is important to ensure that performance fees, where used, can work effectively in the context of DC schemes and deliver value for members.

The Group has been working to move the debate forward by setting out the principles for and approaches to adapting performance fees from a DC schemes’ perspective – to ensure they can deliver value for money and fairness across cohorts of DC scheme members, and overcome the operational challenges specific to DC schemes. These challenges are related to allocating fees to members as fair as possible, in the environment where benefits take time to materialise and members join and leave default arrangement at different times.

A number of views were expressed by attendees, including that for some members performance fees are not an issue in deciding whether to invest, that it was technically quite complex to apply performance fees fairly between members of scheme and that systems would need to be adapted to cope with this, that some defined benefit schemes were now deciding not to pay performance fees, and that it may be possible to gain technical insights from existing fund structures.

Driving operational implementation

The TEG introduced the third issue.

In November 2021 FCA rules came into force establishing the Long Term Asset Fund (LTAF) structure – a new authorised open-ended fund, to support investment in less liquid assets by allowing longer notice periods to reduce liquidity mismatch, and aligning the redemption policy of the fund with the liquidity of its assets. Firms are now able to apply for a fund to be authorised as an LTAF.

Some asset managers have been exploring the possibility of launching LTAFs, some DC pension schemes have been enquiring about LTAFs, and trade bodies have been working with the members to work through any challenges.

Based on extensive external engagement in 2021, the Group’s report concluded that there are no operational barriers to DC scheme investment platforms’ accommodating less liquid assets. Engagement in the context of the LTAF rules launch (e.g., through the IA LTAF Implementation Forum) has identified that some platforms are already able to do so, while others would need to take steps to evolve their systems and processes to do so.

As this is a key next step to removing barriers, as part of a series of outputs in response to the recommendation from the PFWG report addressed at consultants, they are working on a call for action to investment platforms. To support this, consultants will also engage platforms to set out a business case for these changes, and will also consider if their own provider selection criteria effectively evaluate the value of less liquid assets.

To support the launch of LTAFs, as a new fund structure, the Group is also working on a guide on liquidity management, a guide to the legal considerations (including key terms) around the LTAF and a “model” form of the constitutional documents for LTAFs. The FCA will also produce explanatory material setting out the current rules on valuation and unit pricing that apply to LTAFs.

Attendees made a number of comments, including that there was a question of both the supply and demand side in that platforms may not want to invest in system changes without being sure that their clients would invest in illiquids and that the fund management industry was committed to looking at ways to make this work, that it was easier to manage liquidity issues in the defaults of DC schemes which were generally cashflow positive, and that larger DC vehicles such as master trusts and some occupational schemes were bringing illiquid asset management in house or were likely to do so in future. One member mentioned that LTAFs should be made available to retail consumers, while others stressed that LTAF should prove itself in the institutional market first.

Item 4 – Chairs’ closing remarks including next steps

It was noted that significant activity has already happened and many of the report’s recommendations are moving forward effectively. Over the next few months, the TEG will be working towards finalising various guides and the communications and rollout strategy, alongside ongoing work by the official sector, as detailed above. The Steering Committee agreed to monitor progress and continue driving forward the removal of any remaining barriers to investment in less liquid assets, and agree next steps later in the year.

  1. See the list of the Working Group members.

  2. Andrew Bailey (Bank of England), Economic Secretary to the Treasury (HMT) and Nikhil Rathi (FCA).

  3. Lee Foulger (Bank of England) and Nike Trost (FCA).