By Huw Jones and Carolyn Cohn
LONDON (Reuters) -A cap on how much pension funds can invest in less liquid assets should be scrapped to encourage longer-term investing that helps the British economy recover from COVID-19 and meet climate goals, a UK-government backed report said on Monday.
Productive Finance Working Group reported that it recommended encouraging direct contribution (DC), pension schemes to invest more in non-listed or “illiquid assets” such as infrastructure and technology.
The DC scheme faces a 35% cap for investing in less liquid assets. This is one of the biggest barriers that could prevent schemes from increasing such investments.
The report calls for more consolidation of DC schemes. Many are smaller, which makes it difficult to get the best deal from investing in liquid assets.
According to the report, DC funds spend most of their cash in stocks and bonds with daily redemptions for investors. It is difficult to grow scale over time.
DC schemes have seen their value increase from 200 billion to more than 500 billion pounds in 2012. By 2030, they are projected to be worth a billion trillion.
The report stated that DC scheme trustees, consultants and trade organizations should think about how investing in more liquid assets can generate longer-term benefits for their members.
“Investing in UK’s longer-term productive assets like technology, research, development and infrastructure could provide long-term growth boost and help to create a greener, more sustainable future.
The majority of DC schemes do not invest in liquid assets. These that do, however, mainly focus on real estate are far below the 35% limit.
It would be possible to remove the associated red tape, which has prevented funds from investing illiquid assets.
It is an initial step to identify barriers and begin the long-term process of shifting the sector’s attitude towards liquid assets.
Britain will soon launch a Long-Term Asset Fund (LTAF), which can hold illiquid assets within open-ended funds, without having to issue daily redemptions.
Interactive investor and Investor Platform said that the roadmap presented more problems than answers due to its insufficient detail. “There’s no magic wand that can entirely solve the shortcomings of the open-ended fund structure for investing in illiquid assets,” it said.
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