Charges cap stifles investment sophistication, say experts

Speaking at the National Association of Pension Funds' investment conference today, experts voiced concerns that a cap would restrict access to more sophisticated investment strategies.

“A cap at the levels we’re talking about would mean schemes need to use fixed asset allocation strategies; all funds will have to be passive,” said James Churcher, pensions manager at pharmaceutical company Abbott Laboratories.

If schemes were forced into passive funds it could lead to an oversimplified approach that may not best meet the needs of members, Churcher said.

“Our evidence is that active funds outperform passive by about 1 per cent per annum,” said Simon Chinnery, head of defined contribution at JPMorgan Asset Management. “The danger is you get a vanilla solution.”

Schemes would be better served by measures to ensure transparency of charges, Churcher argued.

“If we allow savers and employers to know what is being charged, that will go a long way to lowering costs,” said Churcher. “There’s a lot of work to do in making the total expense ratio clear.”

Comply-and-explain would allow employers and members to differentiate between good-quality advice worthy of a higher charge and managers who charged heavy fees, Churcher added.

DC schemes may be better served by changes in investment approach, improving the sophistication of asset allocation and finding ways to access economies of scale in the same way defined benefit schemes can, Chinnery said.

“There needs to be some consultation on mastertrusts,” said Chinnery. “We need scale to get the best out of DC.”

Chinnery spoke of the increased need for diversification in DC schemes in order to achieve better risk-adjusted returns.

“If we have it in DB why not in DC? We’re treating [DC] as second class.”

He added that the debate around charge caps is less important for member outcomes than focusing what they needed to be saving to meet their specific retirement needs.

“We get one shot at being able to retire,” said Chinnery. “We need to give it the best shot we can to get as many members as possible over the finish line.”

Churcher agreed, saying members' focus should be on ensuring their contributions are sufficient to deliver an adequate retirement income.

“There is no answer to how much everyone should be saving for retirement but it’s more than 8 per cent,” said Churcher.