Productive Finance Working Group roadmap: no crash test dummy

The Productive Finance Working Group has published a report including recommendations it thinks will help defined contribution pension schemes and other investors benefit from long-term opportunities.

interactive investor, the UK’s second-largest direct to consumer investment platform, cautiously welcomes today’s Productive Finance Working Group* Roadmap for Increasing Productive Finance Investment– in principle at least. But it cautions that there is a long road ahead.

Moira O’Neill, Head of Personal Finance, interactive investor, says: “It’s no secret that in a lower for longer world, we need to have more diversified pensions, including illiquid assets like private equity.

“However, our research found too many people are taking their retirement journey in the dark on what they are buying, and how much it costs.

“Lowering costs by even small amounts can mean the difference of thousands of pounds in retirement. So I would be concerned if a move to focus on ‘enhanced outcomes’ was an excuse for the big DC pensions to raise their fees – there is already too little transparency on what value their customers are receiving.  

“So today’s roadmap, while welcome, currently presents more problems than solutions. There’s no crash test dummy at work here – this model is untested. The proposed ‘good practice’ tool kit is unlikely to inspire confidence just yet - you tend to hope that the person driving your car no longer needs to rely on a manual.

“There’s no magic wand that can entirely solve the shortcomings of the open-ended fund structure for investing in illiquid assets.  Today’s roadmap talks about aligning the redemption policy of the fund with the liquidity of its assets, with a suitable redemption policy and notice periods. But the detail is short, and so we have to reluctantly curb our enthusiasm.”

Rebecca O’Connor, Head of Pensions and Savings, interactive investor, says: “The implications of a ‘lower for longer’ investment environment means that we all have fewer options for higher growth. Alternative assets are part of the solution, as is – crucially - the need to save more.

“Our research shows huge swathes of people do not take enough risk in their pensions, and many have no idea what is in them. We need to see more open discussions about risk and reward and better transparency.

“Sadly, today’s paper seems to believe that it is ‘good practice’ to bury any changes to risk-taking or liquidity risks in changes to Terms & Conditions. No one said communicating about private equity and illiquid assets is easy. But that doesn’t mean we should give up. Less is not more, and T&C changes aren’t going to help win hearts, minds, and the increased pension contributions we need to see to give people the retirement outcomes they need.”

*The industry-led Productive Finance Working Group was convened by Her Majesty’s Treasury, the Bank of England and the FCA in November 2020, to develop practical solutions to the barriers to investment in long-term, less liquid assets, with a focus in particular on barriers faced by DC [defined contribution] pension schemes. Addressing these barriers will support DC schemes to achieve long-term value for their members and allow greater investment in productive finance, including venture capital, private equity and infrastructure. [Source: Roadmap for Increasing Productive Finance Investment]