The FCA is consulting on draft rules to allow long-term asset funds (LTAFs) to be marketed to a wider group of retail investors and pension schemes.


An LTAF is a relatively new category of authorised open-ended fund.  It has been designed to enable investors to invest in long-term illiquid assets (eg property and infrastructure) through an authorised fund vehicle.

The "permitted links" rules impose restrictions on the underlying assets that can form the basis of unit-linked funds.  Restrictions on use of illiquid assets meant there was a 35% cap on using LTAFs for unit-linked funds.  Stakeholders told the FCA that this cap meant that firms found it difficult to market funds that invest in illiquid assets to DC schemes.  In 2021 the FCA amended the permitted links rules where the unit-linked contract forms part of the default arrangement for a qualifying scheme (ie a scheme used by an employer to satisfy its auto-enrolment obligations).  The FCA removed the illiquid investments cap, but only for "conditional permitted LTAFs" which were only available for default arrangements in qualifying schemes.

FCA's current proposals insofar as they relate to pension schemes

For qualifying schemes, the FCA proposes to:

  • allow LTAF-linked funds to be made available as part of the self-select option.  This will be subject to guidance stating that the insurer must have protections in place to prevent investors over-exposing themselves to the LTAF-linked fund, which in practice may mean preventing LTAF investment at a level that exceeds that of the default arrangement for that scheme; and
  • allow other kinds of illiquid assets, not just LTAFs, to be used as the underlying assets for unit-linked funds used for the default option;

For other DC pension schemes, the FCA proposes to: 

  • allow LTAF-linked funds to be made available, but only where the scheme member has been advised (though the FCA is open to other suggestions for ensuring an equivalent level of protection).  Insurers will still be required to ensure funds are suitable and redeemable for investors.

The consultation closes on 10 October 2022.  The FCA plans to publish final rules in early 2023.

Our thoughts

The Government is keen to remove barriers to pension schemes investing in illiquid assets and sees pension funds as potentially having an important role in relation to investments in infrastructure projects.  The FCA's proposals are aligned with this wider policy objective, but the fragmented nature of UK pension provision, and the need to maintain liquidity and value at an individual member pot level, throw up considerable challenges to achieving this broader aim. The FCA says it is aware that it may take some time before a significant number of LTAFs are produced and widely marketed.  We think any change in practice following implementation of the FCA's proposals is likely to be a gradual process. 

Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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