The Productive Finance Working Group has today published a series of recommendations which could facilitate greater investment in longer-term, less liquid assets. The Group is industry led, co-chaired by the Governor of the Bank, the Chief Executive of the FCA, and the Economic Secretary to HM Treasury.

Appropriately managed, investment in such assets has the potential to generate better returns for investors, including those saving for retirement in defined contribution (DC) pension schemes, given their typically long-term investment horizons. These types of pension schemes are an increasingly important vehicle for saving for retirement, given their assets have increased from around £200bn in 2012 to over £500bn today, and are expected to double to £1tn by 2030.

Investment in productive finance assets can also benefit the wider economy by supporting the economic recovery from Covid, facilitating the transition to a net zero economy and supporting financial stability. Greater investment in longer-term productive UK assets, such as research and development, technology, and infrastructure can provide a boost to long-term growth and support an innovative, greener future for the UK.

However there are a number of barriers and challenges to investment in less liquid assets and therefore these investment need to be carefully managed. The aim of the Group, convened in November 2020, was to propose solutions to such barriers, including a roadmap, timetable and set of actions.

In its report published today, ‘A Roadmap for Increasing Productive Finance Investment’, the Group has published four recommendations, underpinned by 13 specific actions, with a focus on supporting DC pension schemes to invest and developing long-term asset fund (LTAF) structure.

The recommendations require action from industry and the official sector and will create an environment in which DC schemes and other investors can benefit from appropriate long-term opportunities. They include:

• Shifting the focus to long-term value: DC schemes trustees, trade bodies and consultants should consider how increasing investment in less liquid assets could generate greater long-term value for their members.
• Building scale: The DC market has a high proportion of small schemes.  Their lack of scale can make it challenging for them to invest in less liquid assets for a variety of reasons.  
• A new approach to liquidity management: Most DC schemes currently invest predominantly in daily-dealing funds which in theory means their holdings can be sold at short notice. Investment in less liquid assets does not present the same daily dealing opportunity. Therefore a broader range of DC schemes should find ways to enable them to invest in less liquid assets as part of a diversified portfolio. To support that, the Group recommends industry develop guidance, in collaboration with the Bank and FCA, on good practices for liquidity management at a fund level.
• Widening investment in less liquid assets: The group recommended that the FCA consult on changing its rules for investment in illiquid assets through unit-linked funds and reviewing the LTAF distribution rules to facilitate wider distribution to appropriate retail clients. 

Notes to Editors

1. The final report, ‘A Roadmap for Increasing Productive Finance Investment’ can be found here.
2. Further details on the Productive Finance Working Group, including Minutes from their meetings can be found here.
3. FCA CP21/12: A new authorised fund regime for investing in long term assets can be found here.