The Association of Real Estate Funds (AREF) in the UK is urging the government not to impose new liquidity rules on open-ended property funds before helping defined contribution (DC) pension schemes to invest in illiquid, non-daily-traded assets.

AREF, which represents the UK’s £50bn real estate fund management industry, is concerned that, if proposed redemption notice periods are applied to daily-traded real estate funds in the UK, it would prevent DC pension schemes investing in them, despite ongoing efforts to encourage more DC money to be allocated to unlisted assets.

Three years ago, the Financial Conduct Authority (FCA) proposed introducing 90-day notice periods for redemptions from open-ended property funds, before then moving ahead with plans to create Long-Term Asset Funds to facilite greater investment by DC pension schemes in illiquid assets.

Earlier this year, Jeremy Hunt, the UK’s chancellor of the exchequer, announced a series of measures to enable DC pension funds to invest in illiquid assets and the UK economy, including a programme for DC consolidation and the “The Mansion Compact”, whereby DC funds would commit to investing 5% of their default funds in unlisted equities by 2030.

The decline in defined benefit (DB) pension assets and the widespread shift to DC pensions in the UK, has implications for institutional real estate fund managers in the country, with DB assets traditionally representing a substantial portion of their assets under management.

In its submission ahead of the government’s Autumn Statement in November, AREF warns that reforming property funds without addressing DC pensions could have negative consequences.

The submission includes a number of proposals, including “maintaining the current universe of daily-traded commercial real estate funds”.

It says: “These funds provide daily liquidity for the majority of the time through holding relatively high levels of cash, with rare suspensions under extreme market conditions. They should not have longer notice periods imposed until other avenues have been opened for DC funds.”

The second proposal by AREF is to encourage or mandate DC platforms to hold non-daily-traded assets. “The persistent problem of platforms being unwilling to offer DC funds access to illiquid assets must be solved,” AREF says.

AREF also proposed pushing smaller DC funds to consolidate to create funds with greater scale, and to move DC funds from running individual accounts to the ‘collective DC’ model.

Finally, it urges the government to incentivise the “correct gatekeepers”, with the focus being placed on investment consultants, which advise DC pension schemes, and the in-house teams of large DC schemes – rather than the underlying pension savers.

The submission says: “If DC investment in illiquids does not grow to fill the gap left by the decline of DB investment, there will almost certainly be profound consequences. Levelling up will be more difficult to finance, as will addressing the housing shortage and financing the net-zero agenda through retrofitting.”

Paul Richards, managing director at AREF, said: “The handbrake’s been left on regarding DC investment in illiquid assets – from housing to city centres – and the government can help to take it off.

“Doing so will help redirect billions in defined contribution pension scheme savings into housing, levelling up and net-zero projects. These are the great domestic issues of our time. We and our members are willing to help solve them – but we need a lot of change to enable us to wheel into action.”

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