A government initiative to unlock billions of pounds for the UK’s economic recovery from Covid-19 has been met with lukewarm interest from the pensions and investments industry.
The LTAF concept was initially developed by the Investment Association in June 2019 as part of a package of reforms proposed to the HMT Asset Management Taskforce.
Last November it received the backing of chancellor Rishi Sunak (pictured), who called on the first LTAFs to be launched within the year to encourage pension funds to pump money into illiquid assets like infrastructure to help fuel Britain’s economic recovery from Covid-19.
This week, the FCA unveiled its final rules on LTAFs, stating it wished to move forward with the new fund structure for illiquid assets like infrastructure, property and private equity.
See also: FCA takes forward plans to create long-term asset funds for illiquid assets
Retail investors will initially be excluded from LTAFs
But the investment industry’s response to the FCA’s final rules on LTAFs has been lukewarm.
“I just don’t see the point,” says Fairview Investing investment consultant Ben Yearsley. “You’ve already got monthly-dealing Ucits, you’ve already got investment trusts. I don’t see where this fits.”
The FCA will initially exclude retail investors from accessing LTAFs. The FCA will consult next year on opening up the fund structure to “certain” retail investors, saying this would offer a more controlled route for them to access illiquid asset classes than existing routes, such as unauthorised funds.
Safeguards would be needed to ensure retail investors understand the risks involved and next year’s consultation would set out proposals for how this could be achieved, the FCA said.
But Yearsley says most D2C platforms do not have the capabilities to offer non-daily dealing funds.
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey says a potentially bigger problem are restrictions around holding non-daily dealing investments in an Isa or a Sipp. The addition of non-daily dealing funds to model portfolios could also make automatic re-balancing more complex, Morrissey says.
Liquidity mismatch could shift to DC default funds
For now, the regulator is targeting DC pension schemes, although sophisticated investors and high net worth individuals will also be able to access the funds.
For LTAFs to make any impact, DC pension schemes will have to include them as a small allocation in their default funds given that is where the bulk of savers stay invested, Yearsley says. A balanced fund might have an allocation of 5%, he says.
Aegon pensions director Steven Cameron reckons LTAFs can serve a role for DC pension schemes, although he does not expect a “big bang” of fresh investment in the space.
Cameron agrees that LTAFs are likely to end up as allocations within default funds, but he points out these need to be valued daily. “We need to understand how [the LTAFs] will offer a notional valuation between the actual valuation dates. That’s a hurdle that needs to be overcome.” Under the LTAF scheme, redemptions could take place monthly with a minimum 90-day notice period. In practice, the FCA expects many funds would have “significantly longer” notice periods.
“They also need to work out how they will manage liquidity if people want to divest from the default fund and they can’t sell the long-term asset funds for say a year.”
Liquidity will be front of mind for many DC pension providers due to Department for Work and Pension rules announced last year that require schemes of less than £100m to consolidate if they do not offer value for money, Cameron says. In June, the government announced this would extend to schemes worth up to £5bn.
He says: “It’s not clear how comfortable a receiving scheme would be to accept in-specie asset transfers, and whether they would require you to sell your units and your current scheme and buy new investments in the new scheme. So that’s an area where you need liquidity.”
A good alternative to investment trusts for large investors
In the professional investment space, Tilney head of multi-asset funds Ben Seager-Scott doesn’t expect any immediate plans to invest in LTAFs. “Mostly as our current strategy is positioned more towards opportunities in more liquid parts of the market. These types of structures do provide an additional level of optionality for the future, though.”
Seager-Scott adds: “Overall, though, I think it’s a good development by helping to align the liquidity availability of the fund structure a little more closely to the underlying assets, in a format that can be more applicable to large institutional-style investors where closed-ended vehicles can be less appropriate.”
Without seeing any products, he struggles to pinpoint how much of a portfolio might be allocated to LTAFs. “As a ball-park, though, I’d say it’s almost certainly sub-10%.”
A 90-day notice period would align with quarterly rebalancing, although he notes this is just a minimum. He also says that notice period might be too short during periods of market turbulence and disruption.
It’s going to take time to develop an LTAFs landscape
“I think certainly the government’s desire would be that the first the first wave of demand would come from DC pension schemes,” says Cameron. “They’re the ones with billions under management so they’re the ones who have most potential to make a big difference by investing in a small proportion of their funds.”
Nevertheless, he reckons the first product launches could take some time. That’s despite Sunak’s pledge in November 2020 to have the first LTAFs up and running within a year.
Cameron says: “Any fund manager that wants to set one of these up will first need authorisation from the FCA. Then you’ll need to actually set the fund up, work out where they’re going to invest and put that into practice.”
Some funds will stick with the minimum 90-day notice but others could have notice periods upwards of a year, Cameron says, and it will take time for a range of LTAFs to be developed.
Additionally, DC schemes will take their time understanding the new structures. “They want to do scenario testing, seeing how you would manage extreme events like a big employer leaving the scheme and moving elsewhere.
”As regulated entities, the FCA expects us to do that kind of scenario planning and preparing for any liquidity mismatch we’ve taken on board and whether we have to hold extra capital as a result and all sorts of things like that.”
Ultimately, Yearsley does not expect to see a lot of product development in the space due to a lack of demand.
And even if the FCA rules prompt a raft of fund launches, AJ Bell head of investment analysis Laith Khalaf says the FCA can’t and won’t limit the scope of LTAFs to UK investments.
Khalaf says: “LTAFs will probably prove to be a bit of a damp squib for British business therefore, given that the prevailing investment appetite is predominantly for overseas assets, so the chancellor should brace himself for disappointment over the scale of fresh pension capital that will be directed to building back better in the UK.”
