The Pension Schemes Bill announced in the King's Speech on 17 July builds on the UK Government's drive to encourage defined contribution (DC) pension investment in long-term illiquid investments such as private equity, venture capital, infrastructure and real estate, and accelerate interest in the Long Term Asset Fund (LTAF). As we have noted before (see our alert Private Fund Managers and Retail Investment in the UK and EU: Comparing the UK's Long Term Asset Fund), the LTAF is a UK authorised, open-ended alternative investment fund whose target market includes DC pension schemes; it has been available since November 2021 albeit with a relatively low take up in the market to date.
The Pension Schemes Bill will advance several measures already in train set out in the previous government's Mansion House agenda. The specific measures that relate to those seeking to facilitate pension fund investment are threefold, as set out below.
- First, to provide for the consolidation of DC deferred small pension pots. The intention is to make it easier for individuals to keep their pension schemes in one place after changing employers, likely leading to a greater consolidation of asset pools. We expect this will make it easier for DC schemes to manage liquidity and fee complexities that arise from investing in private funds.
- Second, to introduce a standardised value for money (VfM) framework for trust-based DC schemes; the FCA will ensure it is applied consistently across the pensions market (i.e. to contract-based schemes too). This is in order to shift the focus from cost to longer-term value and aims to ensure transparency and delivery of the VfM concept.
- Third, to consolidate the defined benefit (DB) market through commercial "superfunds".
The LTAF is designed for investment mainly in long-term illiquid assets (the FCA expectation is for at least 50% of the LTAF's investments to be comprised of such assets) and whilst sustainability credentials are not a prerequisite, it is interesting that there is a prevalence of these strategies in the 13 LTAF launches to date. With this in mind, there are two other initiatives in the King's Speech that will be of interest for private fund managers looking at the LTAF, in particular for those in the real assets and infrastructure sectors as well as establishing funds with sustainability objectives:
- First, the establishment of a National Wealth Fund (as set out in the King's Speech following a prior announcement) earmarks £7.3 billion for investment through the UK Infrastructure Bank (that is to be aligned with a British Business Bank-backed Growth Fund) and is "central to this Government's mission to deliver growth and a greener economy."
- Second, the Planning and Infrastructure Bill contains a blueprint for more streamlined planning with a focus on housing and infrastructure.
Whilst the ongoing challenges to DC pension scheme investment in private funds remain – broadly, those of cost and compliance and cultural, operational and structural matters, we continue to see interest in the LTAF across a range of asset classes. This will only be boosted by continued policy developments in this area.
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