A sharper pensions system offers savers safe harbour
If there is any positive to be taken from the downfall of ‘star’ fund manager Neil Woodford, the source of much chatter in the investment world this month, it is that it reminds us of the value of workplace institutions and the collective saving systems we enjoy in the UK.
The Woodford story is a tale as old as time. An active manager posts stellar returns over a short period of time, the financial world – including, it has to be said, the money media – fawn over them, and amateur investors flock to buy the fund.
Except, as we know but retail clients may not, persistent active manager performance is a very hard thing to come by. S&P’s Persistence Scorecard found earlier this year that of 563 top-quartile fund managers in September 2015, just 6.4 per cent remained in the top quartile two years later.
While Woodford Investment Management’s flagship Equity Income fund was not far from its zenith in September 2017, it was not one of the lucky few to remain a top performer, and has since slumped to a next-to-nothing total return over the past five years, gross
of fees.
With trading suspended on the fund while it attempts to divest from illiquid holdings, investors’ futures are uncertain, but many will be facing substantial losses compared with what they might expect from their workplace defined contribution default.
Knowing the cost of something is not the same as securing value for money, although it is an important step on the journey. Trustees must be able to translate the numbers they receive into meaningful analysis, and should probably be expected to report on whether they are doing a better job than their peers
Of course, the irony is that one participant in the Local Government Pension Scheme, the Kent County Council pension fund, followed the retail hype and now finds itself blocked from redeeming its £263m investment, along with the platform punters.
But the point stands that even though returns in the institutional world are anything but guaranteed, the fiduciary structures surrounding workplace pension schemes should offer some insulation against ‘flavour of the month’ managers – trustees are bound by law to consider what is actually under the hood of funds rather than be pulled in by the headlines. At the very least, they should be able to negotiate a discount on fees paid for access to funds.
Transparency in the spotlight
It should then be a source of considerable embarrassment for the collective investment industry that many trustee boards appear not to know the true cost of investment in the funds and assets they have selected.
The source of the confusion is opacity in the asset management, but asset owners can ill afford to hide behind this excuse. Just imagine the reaction if you were unable to tell a member how much they pay for the funds they are invested in.
Templates have now been created to shine an objective light on costs, and, as our cover feature highlights, regulators are now piling on the pressure on non-compliant fund houses - look out for our cover feature tomorrow for more.
Knowing the cost of something is not the same as securing value for money, although it is an important step on the journey. Trustees must be able to translate the numbers they receive into meaningful analysis, and should probably be expected to report on whether they are doing a better job than their peers.
If workplace pensions can sort this out, they will have plenty of cause to shout about their scale, low costs and good governance from the rooftops. This reaffirmation that the financial system works for savers rather than those who operate it should hopefully be a key step to repairing trust in pensions.
Follow Angus on Twitter @peters_angus or the team @pensions_expert
Interested in LGPS? Register now to attend the Pensions Expert Local Government Pension Scheme Forum on 12th September 2019 live.ft.com/LGPS