The Financial Conduct Authority is set to broaden the distribution of long-term asset funds within the pensions sector to self-select options and will push ahead with plans to lift the 35 per cent illiquid investment cap.
A consultation on the proposals, initially set out in a policy statement in October, has been launched by the FCA, asking respondents for their thoughts on extending the distribution of the LTAF beyond defaults in qualifying schemes.
It also asks whether the LTAF should be distributed more widely, particularly to retail investors, so long as appropriate professional support is available.
But some have suggested that the track record of illiquid investment experience should first be spearheaded by institutional investors before retail investors are permitted to trade.
If the aim is to boost overall investments in long-term illiquids, this is unlikely to move the dial
Steven Cameron, Aegon
Illiquid barrier
October’s policy statement amended the permitted links rule, where the unit-linked contract forms part of the default arrangement of qualifying schemes.
It also removed the 35 per cent limit for LTAF-linked funds that form part of the default arrangement of a qualifying scheme, while keeping requirements on insurers to provide risk warnings and ensure the fund is suitable for the ultimate investors.
At the time, the investments were only to be made available to default arrangements, but responses to the previous consultation noted that the 35 per cent limit may “continue to create challenges for unit-linked investment in other illiquid assets, even where they form part of a default and are professionally managed”.
The FCA noted several respondents who said that the current rule only allowing LTAF distribution to default arrangements was “overly restrictive” and other types of investors could benefit from exposure to the illiquid investment vessel.
Investors in non-workplace pension products, for example, “could benefit from exposure to LTAFs”, so long as protective mechanisms were put in place.
The FCA pointed out that outside the default arrangement landscape, there are other balanced managed investment arrangements where the provider designs and governs the portfolio on the investor’s behalf.
And while respondents to the previous consultation made clear that they were not proposing LTAFs be made available for stand-alone investment in a unit-linked wrapper, without access to any supporting guidance and choice architecture, they felt that investors in a long-term unit-linked product who had either professional support on fund selection or are guided through appropriate choice architecture should be able to invest in an LTAF.
In their view, given the degree of substituting between authorised funds and unit-linked funds, if future distribution rules will allow LTAFs to be sold to retail investors, they should also allow for the distribution of unit-linked LTAFs, opening the door for both retail investors and an expanded toolkit available to institutional investors.
But the launch of LTAFs coincides with large institutional investors finding other means to access illiquid investments. In January, Pensions Expert reported that master trusts were already investing in illiquids successfully, potentially limiting the impact an LTAF can offer.
In July, adjustments were made to proposals surrounding master trust Nest’s ability to invest in illiquid opportunities.
Retail emphasis
The bulk of the FCA’s consultation centres on retail investors and how they may access illiquid investment opportunities, but Aegon pensions director Steven Cameron noted that there is not yet a track record and practical experience of trading LTAFs by institutional investors, making the pivot to retail investors uncertain.
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He said: “Some people may have been surprised to see the FCA give priority to its consultation on extending LTAFs to certain retail investors. While it was on the FCA’s ‘to do’ list, to date no LTAF has actually been launched even for institutional investors, making this consultation particularly hypothetical.
“There may be some more sophisticated investors who would benefit from holding 10 per cent or less of their assets in such a vehicle. But if the aim is to boost overall investments in long-term illiquids, this is unlikely to move the dial.
“Any provider considering offering future LTAFs to certain retail investors will have to look long and hard at new consumer duty implications."
