We have written about the opportunities for the managers of private funds, such as private equity, real estate, venture, and infrastructure managers, to increase the investor base for the funds they manage (funds) to include both defined contribution pension (DC pension) scheme and local government pension scheme (LGPS) investment. (See our alerts here and here.)
The recent call by Pensions Minister Torsten Bell MP as part of the Mansion House Accord (see here) for more pension fund investment in private capital has raised the stakes, noting that UK DC pension funds invested 2% of total assets in private equity and 2% in infrastructure last year. This compares unfavourably with the 6% and 8% proportions cited in the Australian market. Together with calls to the LGPS managers to increase the allocation of LGPS investment to UK private equity (generically covering real estate, venture capital, growth equity, private debt, and private equity) from 5% to 10%, the call for the investment of pension monies would represent an increase in investable assets allocated to private equity to £30 billion.
Alongside the removal of carried interest from the cost cap for DC pensions, the DC pension consolidation, and the Financial Conduct Authority’s (FCA) value for money framework, which we discussed in the context of the UK Long Term Asset Fund (LTAF) in our autumn 2024 horizon scan, the Mansion House Accord continues to build political momentum in the UK for greater investor access to private markets.
These measures persevere to create opportunities for both UK managers and non-UK managers to further enable the “retailisation” of their funds as they attract investment from nontraditional sources, such as sophisticated investors and high-net-worth individuals, and categories of investors that a manager can treat (when they satisfy the requirements) as a “professional client” under the EU Markets in Financial instruments Regulation (MiFIR), incorporated into UK law following Brexit.
In this alert, we set out a baker’s dozen of questions and answers for managers, particularly non-UK managers, who are looking to target investment from DC pension and LGPS investors. The questions cover who these investors are, how to market to them, and commercial and technical issues that may come up.
1. What Is a DC Pension Scheme and What Is an LGPS?
A DC pension scheme is a private retirement savings plan for which the amount paid in — i.e., the contributions — is defined, but the final value at and benefits paid during retirement are not guaranteed. A DC pension scheme can be contrasted with a defined benefit (DB) scheme, for which the benefits paid during retirement are specified. DC schemes are usually either workplace or occupational pensions arranged by an individual’s employer or a private pension arranged by an individual.
The Pensions Regulator (TPR) regulates the providers of workplace pensions. According to a TPR publication on 4 March 2025 (see here), occupational DC scheme assets, excluding micro and hybrid schemes, have grown by 25%, from £164 billion in 2023 to £205 billion in 2024. In addition, in 2024 there was a growth of 17% in assets per member (and an average annual growth of 13% in assets per member since 2020).
The types of private pension include a self-invested personal pension (SIPP), marketed as providing the choice of a wider range of investments than other pensions. SIPP providers are regulated by the FCA. The providers of private DC pensions include life assurance companies and institutional fund managers. The UK government noted that the value of individual contributions to personal pension schemes in the UK was £12.8 billion in 2022-23 (the most recent year in the chart), up from £12.7 billion in 2021-22 (31 July 2024 government statistics).
An LGPS is a type of DB scheme in which the scheme members are local government employees. It is administered under the Public Service Pensions Act 2013 through individual pension boards assisted by FCA-authorised investment managers responsible for eight regional pools: ACCESS Pool, Border to Coast Pensions Partnership, Brunel Pension Partnership, LGPS Central, Local Pensions Partnership Investments, London CIV, Northern LGPS, and Wales Pension Partnership.
The Pensions Investment Review: Interim Report November 2024 noted that LGPSs have a combined market value of £392 billion as at March 2024 but also noted that there has been mixed progress in individual local authority schemes transferring assets to the LGPS pools. The UK government wants to accelerate and complete the transition process. A particular aim is that LGPS private capital allocation will help boost UK economic growth, with the government noting the high domestic biases of pension investment within the UK private market.
The pension trustees of an occupational DC scheme and an LGPS are subject to an overriding fiduciary duty to scheme members, in addition to rules on scheme administration and governance, including the TPR codes of practice and guidance on the standards expected when complying with their duties. The FCA-authorised managers of SIPP operators will also be subject to FCA rules, including the rules on acting in the best interests of their clients and exercising due skill care and diligence.
DC schemes and LGPSs can be treated as “professional investors” under the conditions discussed below.
2. What Is the Significance of the Professional Investor/Client Classification?
This classification is important because if marketing funds or having them distributed to a “retail investor,” a UK manager will have additional duties under the UK Alternative Investment Fund (AIF) managers (AIFM) Regulations 2013 (UK AIFMR), FCA rules, and EU Packaged Retail Investment and Insurance Regulation, incorporated into UK law following Brexit (UK PRIIPs).1 (See also our alert here.) It will also be relevant for non-UK managers marketing funds under the UK AIFMR with the additional requirements under UK PRIIPs and the need, possibly, to appoint an FCA-authorised distributor. Under the UK AIFMR, a “retail investor” is defined as someone who is not a “professional investor”. This is defined, in turn, as a “professional client” under UK MiFIR.
3. How Can a Manager Market a Fund in Compliance With the Professional Investor Requirement?
The effect of UK MIFIR and the FCA rules is that the following are included within the definition of a professional investor:
- An investment firm that includes the manager of a DC scheme or an LGPS
- An insurance company that includes the operator of a SIPP
- A pension fund or the management company of a pension fund, broadly defined to include a DC scheme (but note the point below on a LGPS)
- Any other institutional investor
4. What Is the Position on Investor Classification for LGPS?
LGPSs are automatically classified as retail clients under the MiFIR client categorisation regime.
An LGPS may, however, request a manager to reclassify the LGPS as an elective professional client, provided it meets both a qualitative and quantitative opt-up test. In addition to meeting the requirement to have a portfolio size of at least £10 million the LGPS will have to meet one of the following tests:
- It has carried out transactions of significant size in private funds investments at an average frequency of 10 per quarter over the previous four quarters.
- It has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
- It is an “administering authority” of the LGPS within the meaning of the Local Government Pension Scheme Regulations 2013, which is the test, in practice, that the LGPS should be able to satisfy.
A manager will have to give the LGPS notification of its reclassification and clear written warnings of the protections and investor compensation rights it may lose. The LGPS client has to confirm in writing that it is aware of the consequences of losing such protections, which a manager would usually satisfy in the subscription documentation.
5. What Fund Structures Might Facilitate DC Scheme Investment?
A focal part of the democratisation of private capital is the UK’s FCA-authorised LTAF, which allows marketing to UK DC pension schemes and certain categories of retail investors. The LTAF can be used as a feeder vehicle (although the LTAF has to be managed by a UK full-scope manager with permission to act as an AIFM of an authorised AIF). See our recent alert here.
6. What Fund Structures Might Facilitate LGPS Investment?
Investors can invest directly in unregulated private funds. The new UK unauthorised contractual scheme, the Reserved Investor Fund (RIF), is expected to appeal to LGPS investors regarding UK real estate investments in particular who may invest in an umbrella RIF alongside other schemes (see our recent client alert that gives an overview of the RIF, including the reasons why it may appeal to certain strategies).
Wealth management operational platforms (in particular DC pension scheme aggregators) are still to be developed to better facilitate these investments. The political and regulatory momentum is encouraging. However, the development of market infrastructure to address periodic liquidity (that require notice periods from investors instead of daily dealt solutions that the DC market is accustomed to) remains an important building block for facilitating investment by DC pension schemes. Welcome initiatives such as the BVCA’s recent publication of the Final report from the Pensions and Private Capital Expert Panel suggest a blueprint for further reform, including recommendations on policy interventions, facilitating investment and industry collaboration.
7. Are There Any Particular Requests LGPS Investors Are Likely to Ask For in Their Side Letters?
In addition to other typical side letter requests made by other investors (such as subject to confidentiality requirements; disclosure of the identity and certain other details of other limited partners, including those with representatives on the LPAC; and notification of any changes in the LPAC membership), LGPS investors may seek the following:
- Confirmation that the commitments of all LGPS investors in the fund will be aggregated for the purposes of determining any commitment-based benefits (for example, the most favoured nation process and entitlement to appoint a representative to the limited partners advisory committee)
- Confirmation that the LGPS investor can publish certain information in respect of the fund and its investment to meet its disclosure requirements under the UK Freedom of Information Act
- Specific reporting, including reports tailored to the Pension and Lifetime Savings Association’s Cost Transparency Initiative template
- Enhanced responsible investment/ESG reporting requirements
- Excuse rights around specific prohibited investment restrictions
8. Will a Manager’s Management Duties Change Where it Manages a Fund in which a DC Pension Scheme or LGPS invests?
Assuming that a DC pension scheme or LGPS is classified as a professional investor, a manager’s duties in managing a fund in which a DC pension scheme or LGPS invests should be no different to those for a fund in which other professional investors, such as insurance companies and other institutional investors, invest.
That said, for a UK manager, the extent to which it has indirect retail investors in its fund may have an impact on how the FCA expects the manager to comply with its management duties. A theme of FCA pronouncements on its expectations for managers, most recently its portfolio letter explaining its supervision priorities for the asset management and alternatives portfolios, on which we produced an alert (see here) has been the additional care that managers must exercise where there is retail money in the funds they manage. This is a nuanced point because a DC pension scheme or LGPS will itself be managed by professionals who have their own duties to ensure that any investment in a fund is prudent and in the best interests of the underlying beneficiaries.
In practice, a fund manager should consider ensuring that the managers of a DC pension scheme or LGPS properly understand the liquidity and other risk of investing in the fund and the fund manager should satisfy themselves that an investment in the fund is compatible with knowledge and experience of the DC pension scheme or LGPS manager and the financial situation, risk tolerance, and investment objectives and needs of the DC pension scheme or LGPS.
9. How Does a Non-UK Manager Market Funds to Prospective Professional Investors in the UK?
A non-UK manager must comply with Regulation 59 of the UK AIFMR when it or a distributor acting on its behalf “markets” the fund that it manages — i.e., makes a direct or indirect offering or placement of interest in the fund to or with an investor domiciled or with a registered office in the UK at the initiative of, or on behalf of, the manager.
Regulation 59 contains the UK National Private Placement Regime (NPPR).2 Regulation 59 requires a third country manager that is not a small AIFM to give a written notification to the FCA before marketing a fund that it manages. The manager must confirm that it has satisfied the following conditions:
- It is the person responsible for complying with regulation 59 and the related FCA rules relating to the marketing of the fund.
- The manager complies with the requirements of the FCA rules governing investor information, annual reporting for the fund, and reports to the FCA.
- The manager complies with the provisions in Part 5 of the UK AIFMR governing the fund’s acquisition of control of unlisted companies.
- Appropriate cooperation arrangements for the purpose of systemic risk oversight and in line with international standards are in place between the FCA and the supervisory authorities of the country where the manager and fund are established.
- The country is not listed as a Non-Cooperative Country and Territory by the Financial Action Task Force.
The UK NPPR requires non-UK managers to submit a notification to the FCA using their online system, FCA Connect. Marketing to UK investors is permitted immediately after the information required to be provided under Regulation 59 of the UK AIFMR is sent to the FCA.
In practice, a manager should make an NPPR notification only if it is reasonably certain that it will get UK investor commitments. There is no harm in making a notification at an earlier stage because a managers may withdraw the notification in the FCA Connect system. The only disadvantage of this approach is that managers will then be committed to making reports under the FCA rules (see below) for that stub period between submission and withdrawal from when the manager was registered with the FCA.
10. What Are Requirements for Investor Information, Annual Reporting for the Fund, and Reports to the FCA Under the NPPR Regime?
As noted above, a manager will have to make certain information available to investors before they invest in the fund. This is set out in the FCA rules and includes descriptions of:
- The fund’s investment strategy, objectives, investment techniques it may employ, and applicable investment restrictions and details of any leverage (including details of any collateral and asset reuse arrangements and the maximum level of leverage the manager is entitled to employ for the fund)
- For a feeder fund, where the master fund is established; if a fund of funds, for the underlying funds
- The procedures by which the fund may change its investment strategy and/or investment policy
- The main legal implications of the contractual relationship entered into for the purpose of investment, including information on jurisdiction, applicable law, and the existence of any legal instruments providing for the recognition and enforcement of judgments in the territory where the fund is established
- The identity of the manager, the fund’s depositary, auditor, and any other service providers, along with a description of their duties and the investors’ rights
- How the manager complies with the requirements to cover professional liability risks under the capital requirement provisions (which will be via either additional own funds or professional indemnity insurance)
- Any delegated management or depositary function and any conflicts of interest that may arise from them
- The fund’s valuation procedure and pricing methodology (including methods for valuing hard-to-value assets)
- The fund’s liquidity risk management, including redemption rights in normal and exceptional circumstances and existing redemption arrangements
- All fees, charges, and expenses, including maximum amounts directly or indirectly borne by investors
- How the manager ensures fair treatment of its investors and any preferential treatment received by an investor (by way of side letter or otherwise)
- The procedure and conditions of issue and sale of units or shares
- The latest net asset value of the fund or the latest market price of the units/shares of the fund (in line with the valuation regulatory requirements)
- The latest annual report (see below)
- Where available, the historical performance of the fund
- Prime brokerage arrangements
- Any disclosures when using a sustainability label under the FCA’s Sustainability Disclosure Requirements and labelling regime (or information where a fund is not using a label but the fund has sustainability-related terms in its name or marketing materials)
- Any arrangements made by the depositary to contractually discharge itself of its liability under UK AIFMR and any changes regarding depositary liability
- Where relevant, on securities financing transactions and total return swaps
In addition, a manager has to disclose to investors periodically:
- The percentage of assets that are subject to special arrangements arising from their illiquid nature
- Any new arrangements for managing the liquidity of the fund
- The current risk profile of the fund and risk management systems employed by the manager
- Where a manager manages or markets in the UK a fund employing leverage, the maximum level of leverage permitted (as well as any right of reuse of collateral or any guarantee granted under the leveraging arrangement), and the total amount of leverage employed by the fund (which must be disclosed regularly)
As to the general periodic reporting, a manager must make audited annual reports available to investors within six months of each financial year. This must be provided to investors on request and made available to the FCA. This includes the following information under the FCA rules:
- A balance sheet or statement of assets and liabilities, along with an income and expenditure account for and report on the activities of the financial year
- Any material changes to the information provided to investors by way of prior disclosure (as set out above) covered by the report. A change is deemed material if there is a substantial likelihood that a reasonable investor becoming aware of the information would reconsider its investment in the fund
- Total remuneration for the financial year paid by the manager to its staff, split into fixed and variable remuneration (including any carried interest paid by the fund) and number of beneficiaries
- Aggregate renumeration broken down by senior management and members of staff of the fund whose actions have a material impact on the risk profile of the fund
- Where relevant, on securities financing transactions and total return swaps
In addition, the manager has to report to the FCA as follows (the frequency of which depends broadly on the manager’s assets under management, but for a manager managing a fund that is unleveraged and invests in non-listed companies and issuers to acquire control – that is, private equity strategies – reporting is annual):
- Aggregated information on the main instruments in which it trades, the principal markets of which it is a member or actively trades, and the principal exposures and most important concentrations of each of the funds it manages
- The percentage of a fund’s assets that are subject to special arrangements arising from their illiquid nature
- Any new arrangements for managing fund liquidity
- Current risk profile of the fund and risk management systems employed by the manager to manage market, liquidity, counterparty, and operational risks
- Information on the main categories of assets in which the fund is invested
- Results of stress tests for investment risk and liquidity risk
- On the FCA’s request on a quarterly basis, a detailed list of all funds it manages
- For managers managing funds that employ leverage on a substantial basis (i.e., when fund exposure calculated according to the “commitment method” exceeds three times its NAV):
- Overall level of leverage employed
- Breakdown of that which arises from borrowing of cash or securities and embedded in financial derivatives
- The extent that the fund’s assets have been reused under leveraging arrangements
- The identity of the five largest sources of borrowed cash or securities for the fund and the amounts of leverage received from each of those sources
- Geographical focus of investments, short positions, value at risk, and sensitivity to foreign exchange rates and commodity prices
11. What About “Pre-marketing” Activities?
There is no equivalent in the UK to the EU cross-border distribution of funds regime that amended the EU AIFMD to introduce “premarketing” notification requirements. A manager will not, therefore, have to notify the FCA when it or someone acting on its behalf seeks to distribute, for example, a promotional presentation or a pathfinder private placement memorandum — which, as noted below, the FCA does not deem to amount to marketing — to a pension manager. The manager will, however, have to ensure that it does not breach the Financial Promotion Restriction (as defined below) and ensure that it or its agent’s distribution activities comply with the Financial Promotion Order, noted below.
As a precaution to avoid the FCA treating any distribution activities as marketing, the manager must make it clear that a pension manager cannot use any pathfinder private placement memorandum or draft subscription for a pension investment but that, if a pension manager wishes to invest in the fund, the fund documentation will be provided once the manager has made a marketing notification to the FCA.
12. Does a Non-UK Manager Need to Consider Anything Else Under the UK Regime for Distributing Funds?
When interests are marketed to UK persons, it is necessary to consider the financial promotion regime. Under Section 21 of the Financial Services and Markets Act 2000 (FSMA 2000), no person may “communicate an invitation or inducement to engage in investment activity” to any person in the UK unless that person is FCA-authorised, the communication is approved by an FCA-authorised person, or an exemption applies with respect to the communication (the Financial Promotion Restriction). The Financial Promotion Restriction is not limited to AIFM marketing but extends to any promotional activities undertaken and materials provided, such as slide decks distributed before the “marketing” stage.
The FSMA (Financial Promotion) Order 2005 (FPO) sets out the exemptions from the Financial Promotion Restriction. Exemptions apply to (amongst others) the following categories of investor, which would be relevant in the context of promoting investments to a DC pension scheme or LGPS: FCA-regulated firms; high-net-worth companies, unincorporated associations, or partnerships; and investment professionals.
A manager will need to be satisfied that the DC pension scheme or LGPS falls within a relevant exemption. It is usual for the manager to place disclaimer language in any promotional materials, including any pre-marketing documentation, that identifies the exemptions and indicates that anyone that does not fall within any of the exemptions should not rely on the materials.3
13. Are There Circumstances in Which a Non-UK Manager Can Market a Fund Without Having to Comply With the NPPR Process?
When a manager can demonstrate that a UK investor has approached it on the investor’s own initiative, the FCA notification requirements discussed above will not apply. This is generally referred to as “reverse solicitation,” and the FCA guidance indicates that a written request from the investor should be sufficient to establish reverse solicitation. The Financial Promotion Restriction will, however, still apply. Therefore, if the manager can rely on reverse solicitation, all communications must be limited to persons who fall into one of the exemptions contained in the FPO.
Reverse solicitation, however, is not typically a path chosen for a manager looking to bring more than a very small number of UK investors into a fund. The greater the number of investors, the more likely the FCA would be to ask why the manager had not notified the fund for marketing and complied with the disclosure and reporting requirements under the FCA Rules.
You may also be interested in our related briefings:
Reforming the UK Regime for Private Fund Managers: FCA and HMT Papers Point the Way
UK Regulatory Capital Reforms: A Boost for Start-Up Founders and Venture Capital Investors?
ELTIF 2.0 RTS: Second Time Lucky and A Positive Step Forward on Liquidity and Redemptions
The FCA’s Final Rules For LTAFs: Distribution To Mass Market Retail Investors
Recent Updates in the UK Venture Fundraising Landscape
Sustainability Disclosure Rules in the UK: Extending the FCA’s Regime to Portfolio Managers
The FCA’s Sustainability Disclosure Requirements and Labelling Regime (SDR): A Flexible Regime for UK Private Fund Managers
A new UK-based unauthorised fund vehicle now available – The Reserved Investor Fund
Horizon Scan for Private Investment Funds: Key Recent Funds, Legal, and Regulatory Developments to Look out for in the Year Ahead (February 2025)
[1] The UK PRIIPs regime is due to be replaced with a new disclosure framework for retail investors (the Consumer Composite Investments regime) and a policy statement is expected later in 2025 (the FCA consultation for consequential amendments closed on 28 May 2025). The biggest change is likely to be the need for international firms to follow two distinct regimes and produce two different disclosure documents for UK and EU retail offerings. An 18-month transitional period is proposed.
[2] Regulation 59 was promulgated to give effect to Article 42 of the EU AIF Managers Directive (EU AIFMD). The requirements under Regulation 59 remain near identical to those in Article 42 for marketing AIFs in the EU and European Economic Area, save that requirements under the EU Sustainable Finance Disclosure Regulation (SFDR) do not apply to the funds in the UK. It is likely that the UK Sustainability Disclosure Requirements and investment labelling regime, which, like the SFDR, require the disclosure of certain items of information for the distribution of ESG-related funds in the UK, will be applied to the distribution of non-UK managed funds in due course.
[3] There are also exemptions for certified sophisticated investors; self-certified sophisticated investors; and high-net-worth individuals for non-professional investors that would require the investor to provide the appropriate signed statement (set out in the FPO). This would be relevant where classification as a professional investor is not possible. We noted the UK PRIIPs Key Information Document above. A Manager will also need to undertake a suitability assessment and risk warning. A UK Manager would also have to consider its duties under the UK consumer duty, which is likely to require providing the investor with additional information (See our alert here.)
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