Minutes of the Productive Finance Working Group – May 2021


Item 1 – Reminder of competition law obligations by Simmons & Simmons

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 – Chairs’ opening remarks

2. Nikhil Rathi welcomed the meeting participants and set the objective for the meeting – to discuss the results of the Technical Expert Group’s (TEG) work to date and agree the next steps.

3. The Steering Committee (SC) chairsfootnote [1] reminded the meeting participants the aims of the Working Group, namely, to develop practical solutions to the barriers to long-term, less liquid investment. They noted the urgency of this work to help aid economic recovery from Covid-19. Economic Secretary to the Treasury noted this would also help support a transition to a carbon neutral economy.

Item 3 – An update from the Technical Expert Group

4. The TEG summarised their progress on developing solutions to the barriers to long-term, less liquid investments. The TEG’s work has been structured around three key themes: design of the Long-Term Asset Fund (LTAF); addressing the operational barriers to distribution of the LTAF and other non-daily dealing funds; and developing solutions to the barriers to demand for less liquid investment.

5. At the meeting on 26 January, the SC asked the TEG to consider the appropriate target investor groups for the LTAF. In response, the TEG proposed adopting a sequential approach. The TEG’s initial focus is on default arrangements of defined contribution (DC) pension schemes, given it is a growing market with clear barriers to investment in less liquid assets. This does not preclude making the LTAF available to a broader range of retail investors in future if the right consumer protections are put in place.

6. The TEG has been developing a blueprint for the LTAF, which includes a) allowing a broad range of less liquid assets by type, sector, and jurisdiction (including non-UK) and b) aligning the fund’s liquidity with that of its assets, meaning non-daily dealing and longer notice periods. The FCA has recently consulted on the LTAF, incorporating the feedback of this group.footnote [2]

7. The LTAF is not the only structure for investment in less liquid assets. The TEG has therefore also been considering the practical barriers to investing in less liquid assets more generally, and has identified the following key areas of work over the coming months:

  • Supporting DC schemes to manage liquidity not just at the fund level but also the portfolio level (across the default pension product). This will be essential to accommodate any allocation to non-daily dealing funds.
  • A focus across industry and the official sector on striking an appropriate balance within DC schemes between cost minimisation, liquidity needs and securing overall long-term value for members.
  • The TEG has identified and reviewed operational barriers to the distribution of LTAFs and other non-daily dealing funds, and the preliminary conclusion is that none are insurmountable – but these will likely only be addressed by distributors if there is sufficient demand for these products.

8. The TEG concluded that overcoming these barriers would require commitments across the private and official sector, i.e. the actions the relevant stakeholders will need to take to implement the agreed solutions to the barriers to investing in less liquid assets.

Item 4 – Discussion

9. The SC thanked the TEG members for their work, and for making considerable progress over a short period of time.

10. The SC discussion focused on the questions posed by the TEG to the SC members. There was a broad consensus among the SC members on the main issues, and some additional suggestions, summarised below.

11. Target investor group: The SC on balance agreed with the sequential approach proposed by the TEG, and that the TEG should focus on DC schemes first. A number of members noted the need for a clear roadmap for considering investors beyond DC schemes. The FCA is considering some of these issues in its LTAF consultation. The SC noted the tensions that will need to be considered, including issues around consumer protection and the operational barriers to distribution of non-daily dealing funds to retail investors.

12. Key features of the LTAF blueprint: There was broad agreement with the LTAF blueprint proposed by the TEG and with the proposal to prioritise liquidity as a key area of work in the next phase. In particular:

  • The SC agreed with the proposed work plan on liquidity. Some SC members also called for a greater focus on specific standards, including minimum standards on aligning fund liquidity with that of its assets.
  • There was interest to see more work on leverage as an additional issue.
  • Some SC members were interested in the links between the TEG’s work and environmental, social and governance (ESG) considerations, and suggested more attention should be given to exploring this topic in the next phase. One member noted that ‘productive finance’ is not a well-defined term, and that the group should agree what types of assets represent productive finance.

13. Removing barriers to DC demand: The SC agreed that this is an important issue and suggested the Working Group should continue to engage with industry participants on the possible solutions. The SC also agreed that the work should focus on fiduciary duty, cost as a barrier, and engaging with Trustees to promote awareness of the issues and provide support to overcome them. One member suggested that it could be helpful to require pension schemes to actively consider investing in less liquid assets, and where they do not, to set out the reasons why. Another member mentioned that such approach could be difficult to operationalise.

14. Commitments: There was a clear interest in making tangible progress, to ensure the proposed solutions are implemented. The SC agreed that the Working Group should work towards commitments from both the private and public sector by July. The SC members were also interested to have a clear view on the criteria of success of this work overall, as well as through the entire chain of the key market participants, including funds, platforms, and investors. The SC proposed that the TEG sets out several possible LTAF examples and tests them with a broad range of industry stakeholders, to assess potential barriers across the distribution chain and to formulate solutions to them.

Item 5 – Chairs’ closing remarks

15. Nikhil Rathi summarised the key discussion points and thanked the TEG in advance for taking forward the work discussed by the SC members ahead of their next meeting in July 2021.


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