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Innovating to include Illiquids in DC pension funds

Authors: Chris Gower & David Merton

Back in 2020, with interest rates still at historically low levels, the Productive Finance Working Group was convened to find a way forward for UK pension savers to be able to more easily invest in long-term illiquid assets. The following year, in September 2021, the group published a report outlining a series of recommendations to overcome this challenge.


This led the UK regulator, the Financial Conduct Authority (FCA), to finalise rules for a new category of open-ended authorised funds known as a Long Term Asset Fund (LTAF) in October 2021. When this structure receives the FCA’s approval, the catalytic effect this could have on UK Defined Contribution (DC) schemes could be significant.   


Unlike defined benefit schemes, DC members oversee their own individual pension savings, as opposed to receiving a final salary paid out by their employer upon retirement.


DB schemes are becoming, in the words of one Hargreaves Lansdown analyst, an “endangered species”, with DB membership numbers in the private market falling 2.5 million over the last decade. And, while they do remain the preserve of public sector workers (teachers, nurses, police), the prospect of the LTAF coming to market means that DC schemes (and their members) stand on the cusp of a key paradigm shift.


For the first time, illiquid assets could become a key part of a DC member’s portfolio and give pension investors critical exposure to long-term private market assets, such as infrastructure, providing a broader canvass for asset class diversification. However, the efficacy of investment will depend on how the LTAF itself is designed.


In this respect, our thesis at Fulcrum is quite clear: build a diversified strategy that invests across the whole of the private market capital spectrum by accessing a range of niche private market specialists.


Arguably, the recent crisis in UK gilts, which saw long-term yields top 5.1% in October 2022 and required urgent intervention from the Bank of England, has further accelerated the endgame for DB. Now is the time for DC to pick up and take advantage of the illiquid asset investment mantle.


At Fulcrum, we are focusing our efforts on innovating for DC to provide members with high-quality, value-add assets through designing an innovative LTAF fund solution. Up until now, it has been very difficult for fund platforms to offer illiquid investments to DC savers – the LTAF structure removes many of these barriers.

Going modular

Our innovative modular investment design allows for breadth and depth of diversification across the five key asset classes in private markets: infrastructure, credit, private equity, natural resources and real estate. Within our design, priority will be given to value-add investments.


When we set up Fulcrum Alternative Solutions in 2018, one of our primary goals was to improve the quality and access of alternative investments available to DC savers. We have achieved this in the liquid space, with the launch in 2018 of Diversified Liquid Alternatives. Now we aspire to do the same in the illiquids space via the LTAF.


Our intention is to be a “bridge” between DC members and specialist, value-add fund managers. There are large numbers of small, highly specialised illiquid asset managers that will most likely never launch an LTAF, though they would welcome the chance to provide access to their strategy to pension savers. Fulcrum’s LTAF will act as a financial conduit, backing talented managers (using an open-ended ‘fund-of-one’) and connecting them to long-term DC member capital.


On the issue of whether performance fees ought to be applied, we wrote an article recently which highlighted a split in opinion between asset managers and allocators. Perhaps unsurprisingly, managers are more in favour of this approach, though we remain unconvinced.


In September 2022, the Chancellor of the Exchequer announced that performance fees would be removed from the DC charge cap to spur UK pension fund investment in UK assets. Be that as it may, we are client-led as to whether our LTAF should be flat fee or have performance fees. Our feedback, thus far, strongly advocates for flat fees.

A new investment paradigm?

With DB membership numbers declining, is this an opportunity for DC schemes to move pension fund investors into a new investment era? We would argue that it is, thanks to regulatory tailwinds and the LTAF’s ability to invest more broadly, and more easily, in illiquid assets.


Market moves and the increase in the cost of capital are likely to create numerous, compelling private market opportunities in the months and years to come. Fulcrum’s aim is to make these available to DC savers through working with specialist managers, and in doing so, create a long-term private markets programme with strong ESG integration credentials embedded throughout.


Many DB funds are now closed, with workplace DC assets set to approximately double from £500 billion to £1 trillion by 2030.


The LTAF has the potential to provide a crucial, high-voltage jolt to invest in global private market assets over the coming decades. At Fulcrum, we are plugged in and ready to go. 


About the Author

Chris Gower

Chris Gower, FIA, joined Fulcrum in 2018 and leads their institutional client team. He works closely with a wide range of DB & DC Pension Schemes, Charities and their investment consultants with the ultimate objective of helping them to meet their investment objectives. Chris has always viewed that investing sustainably and generating returns are not mutually exclusive.

About the Author

David Merton

David is a Portfolio Manager within Fulcrum Alternative Solutions and is a member of the Fulcrum Alternative Solutions Investment Committee. Previously he worked as a Director at Time Partners Investment Advisory, before which he worked alongside Matthew Roberts as a Portfolio Manager at Willis Towers Watson. David holds a BSc in Chemistry from the University of Surrey. He has been a CFA charterholder since 2016.

David Merton

Fulcrum Asset Management LLP. This document represents a marketing communication (non-independent research). It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.


Fulcrum Asset Management LLP (‘Fulcrum’) defines marketing communication as market commentary consisting of illustrative, critically educational explanatory notes written to discuss or equally support an article or other presentation previously published. This document is also considered to be a minor non-monetary (‘MNMB’) benefit under Directive 2014/65/EU on Markets in Financial Instruments Directive (‘MiFID II’). Fulcrum defines MNMBs as documentation relating to a financial instrument or an investment service which is generic in nature and may be simultaneously made available to any investment firm wishing to receive it or to the general public. The following information may have been disseminated in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service provided by Fulcrum.


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