The Financial Conduct Authority (FCA) has finalised the rules for its Long-term Asset Fund (LTAF) framework in an effort to encourage greater investment in long-term illiquid assets and generate better returns for pension savers.

The LTAF will be a new FCA-regulated fund that is designed specifically to help investment in assets including venture capital, private equity, private debt, real estate and infrastructure.

It is expected to address the “market failure” of defined contribution (DC) pension schemes not investing in long-term illiquid assets, despite having the investment horizon to do so.

The fund was designed to secure an appropriate degree of protection for consumers, with protections build into the structure that are commensurate with the degree of risk from investing in a fund that is predominantly exposed to illiquid assets.

The FCA acknowledged that these protections cannot remove all investment risk, clarifying however, that it secures an "appropriate level" of consumer protection for investors to whom an LTAF can be marketed or offered as part of a DC pension scheme default strategy.

“The LTAF means that scheme members now have better opportunities to benefit from potential illiquidity premiums of long-term illiquid assets,” it stated.

“By requiring the LTAF’s redemption terms to match the liquidity of the underlying investments, we consider this will help advance our market integrity objective.”

The FCA has also confirmed that it will push ahead with proposed amendments to permitted link rules, including removing the 35% limit for LTAF-linked funds that form part of the default arrangement of a pension scheme.

The amendments are expected to allow more flexibility in the the use of illiquid assets via the LTAF, to enable more flexibility in the construction of DC scheme portfolios while maintaining an adequate level of protection for DC default scheme investors.

Whilst the FCA has confirmed that it will not be adding specific sustainability disclosures to the rules, it clarified that the government's recently announced sustainability disclosure regime is anticipated to apply to LTAFs.

Commenting on the plans, FCA chief executive, Nikhil Rathi, said: "We are supporting fresh collaborative thinking designed to improve the effectiveness of UK markets while protecting standards.

“If this innovative fund structure, created by our rules, is taken up by the asset management industry, it may provide alternative routes to returns for investors, while supporting economic growth and the transition to a low carbon economy."

The FCA also confirmed that whilst the LTAF will be treated as an non-mainstream pooled investment and will initially be marketed to professional investors, such as DC pension schemes, it will be consulting next year on the potential for widening the distribution of the LTAF to certain retail investors, as recently recommended by the Productive Finance Working Group.

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