Minutes of the Productive Finance Working Group – 28 July 2022


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 – Updates from the sub-groups and discussion

The chairs of the Technical Expert Group (TEG) footnote [2] welcomed the meeting participants and set the aims of the meeting – finalise the guides ahead of them being sent to the Steering Committee in August, to discuss next steps to maximise the impact of the materials, and agree how (and where) the guides would be hosted.

The Chairs thanked the TEG members for all of their work. The Chairs commented on the amount of stakeholder engagement and feedback that had been taken into account in devising the guides which had resulted in high quality products.

The TEG comprises five sub-groups, focusing on liquidity management, value for money, performance fees & Long-Term Asset Fund (LTAF) legal considerations, actions by investment and employee-benefit consultants, and raising awareness. The leads from each sub-group provided short summaries of progress for discussion, as follows.

Liquidity management: The Chair of sub-group thanked members for their fantastic work. The guide explores key liquidity management considerations from the perspective of Defined Contribution (DC) scheme decision makers, considering or already investing in less liquid assets. The guide is designed to help inform the DC decision makers consideration of liquidity at two levels: the DC scheme level and the level of a fund that invests in less liquid assets.

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. 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.

Performance Fees: 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 to neither advocate nor discourage the use of performance fees, but to move the debate forward by setting out potential approaches to 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. Valuable feedback was received via the road-test on the need to bring out practical implications for decision makers. The sub-group has addressed this feedback by setting out potential key actions for Trustees and the questions that they should ask.

LTAF legal considerations: A legal guide to the LTAF has been produced in order to provide a short, non-technical guide to the legal provisions in order to enhance people’s understanding of the LTAF as a new fund structure. Model constitutional document has also been produced for the LTAFs, to help streamline the legal process for LTAFs.

Investment and employee-benefit consultants: The sub-group has developed a proposal for investment and employee-benefit consultants to jointly make a public commitment to shift the focus from cost to long term value when advising their DC scheme clients. The proposal has been road-tested with the consultant members of the Productive Finance Working Group who were supportive and have agreed to endorse this commitment. The sub-group has also prepared an accompanying list of key considerations for consultants on advising clients on less liquid assets. Lastly, the sub-group has developed a call to action for DC investment platforms, setting out the steps that the platforms need to take to support investment in less liquid assets. It was noted that the platforms evolving their systems and processes is a crucial step in removing the barriers to investment in less liquid assets.

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. It was acknowledged that there are a number of legal structures that can be utilised to access investment in long term illiquid assets, and not just the LTAF. This workstream is working on a communications and rollout startegy, coordinated among the trade bodies, covering a range of formats including events and conferences, published materials, webinars, training sessions and teach-ins.

Discussion: TEG members were 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. It was agreed that it would be helpful for the Steering Committee to consider how they could support the launch of these guides and help embed this work in practice. The TEG agreed to aim to publish the guides in the autumn. One TEG member noted the importance of thinking how to monitor progress and measure the success of removing the barriers to investment in less liquid assets. TEG members agreed to consider internally whether, and if so how, their Steering Committee members could support the launch events and the key messages from their perspective.

PLSA stated that their annual conference will be held in October, and offered to explore the possibility to organise a panel on the Productive Finance Working Group’s work and acknowledge it in the keynote speech. PLSA also offered to do an article on the guides in a magazine around the time of the conference, and potentially host a webinar. A TEG member noted it was important that that the narrative looks to raise awareness as opposed to recommending investment into certain asset classes.

There was general agreement among the trade associations to host the Productive Finance Working Group’s outputs on their websites.

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 safe distribution of LTAFs to retail clients, and is planning to consult in August. 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 will also be consulting on changing the permitted linked rules to remove the 35% limit on illiquid assets for other authorised fund structures, to align with the LTAF rules, in line with the recommendation in the Productive Finance Working Group’s 2021 report. The FCA has also taken forward the action to produce a guide to valuing/ pricing units within the LTAF, which will be published shortly.

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 reiterated that they expect the work on performance fees and disclose or explain to remain their priorities, despite government changes. 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.

Item 4 – Next steps

The Chairs thanked TEG members for their work. It was agreed that the sub-groups have done their job and going forward only one workstream would continue meeting, focusing on the launch of the guides and communications strategy. All the members were welcomed to join that workstream. It was agreed there would be no need for a further Steering Committee meeting ahead of the launch.


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