Brexit, pooling and transparency: Top investment stories from 2016

The UK’s decision to break away from the EU created a great deal of political and economic uncertainty. From hunting for yield to focusing on hidden fees, our top six investment-related articles from this year spanned a number of successes and potential struggles for pension schemes.

Pensions shrouded in uncertainty as UK votes to leave

June 24

The UK’s vote to leave the EU came as a shock to many, but experts advised pension funds not to overreact.

When the market opened on the morning of June 24, the day after the EU referendum result, the FTSE 100 fell more than 8 per cent, while the wider FTSE index fell 12.2 per cent. Despite this market volatility shrouding scheme investments in uncertainty, trustees were advised to keep calm.

“We all know pensions is a long-term game... It might be that the long-term outlook isn’t radically altered,” said Steve Webb, director of policy at provider Royal London.

Soon after the news that the Leave campaign had won, David Cameron announced his resignation as prime minister. This raised questions as to who would become chancellor under his successor, and whether potential policy changes for pensions would be off the table.

However, Marcus Fink, partner at law firm Ashurst, said that possible changes such as a taxed-exempt-exempt regime were “likely to be prominent in any post-Brexit Budget, regardless of the chancellor”. 

RBS scheme diversifies with US life settlements

September 26

In a bid to diversify its portfolio, the £31.1bn RBS Pension Scheme added US life settlements to its portfolio, among a number of other new investments.

Life settlements are a form of insurance-linked security. According to Simeon Willis, director and head of investment strategy at KPMG, this asset class has “been an area of growing interest for investors”. Despite this, he said that it is a niche area, and will probably remain that way due to the size of the market. 

As an increasing number of pension funds look to diversify, smaller schemes have continued to turn to solutions such as diversified growth funds. But schemes of all sizes should not forget the importance of focusing on asset classes that provide adequate returns, warned Willis, because “diversification alone isn’t sufficient”. 

RPMI dedicates staff to cost investigation

March 9

After discovering that it was paying far higher fees in its pooled investments than it had previously thought, the Railways Pension Scheme hired a full-time employee to investigate costs.

Chris Hitchen, chief executive of RPMI, revealed that the fund found it was paying four times what it had thought, at a time when cost savings are remaining high on the agenda for most schemes.

He advised schemes to review their own investment portfolios to examine how they could minimise costs without negatively affecting returns.

Some of the steps taken by the scheme in order to achieve this objective included a shift away from active equities in a hunt for more transparent, cost-effective options.

Governance is key as dispute rocks asset management industry

August 12

A study of 1,350 retail equity fund accounts, conducted by the Investment Association alongside research company Fitz Partners, showed that funds outperformed their relevant benchmarks by more than the total of their transaction costs and ongoing charge figures.

The findings contradicted past criticisms faced by the IA with regard to major hidden fund fees. Nevertheless, the asset management body continued to state its commitment to transparency with an announcement that it would publish a disclosure code for members. It also set up a Cost Disclosure Advisory Board to focus on improving cost transparency.

However, some urged schemes to tighten governance and focus on transparency, despite the suggestion that there were no hidden fees in funds.

Andy Agathangelou, founder of campaign group the Transparency Task Force, highlighted the 'Jekyll and Hyde' contrast between the IA’s efforts to combat opacity and the conclusion drawn in the study.

West Midlands saves £25m with in-house mandate

July 4

West Midlands Pension Fund found savings of more than £25m a year following a number of investment changes and the introduction of a two-pronged strategy to reduce administration costs.

The majority of the savings were made by establishing a £500m global equities portfolio, along with withdrawals from hedge funds and commodities.

The global equities portfolio is managed in-house, and the fund said it would continue to review its in-house offering as LGPS pooling proceeds.

Mark Packham, public sector pensions leader at consultancy PwC, said only a handful of funds had built up expertise in managing investments in-house, which would then lead to some of the pools having said expertise once they are fully operational.

With regard to administration expenses, the pension fund made significant in-year savings due to tight management of costs throughout the year. This included challenging all expenditure to ensure that it was both necessary and represented value for money.

Jaguar Land Rover revs up global credit

April 25

Jaguar Land Rover decided to alter the strategic asset allocation of its two pension schemes by boosting its exposure to global credit and reducing liability-matching asset allocation.

Some experts noted that many pension funds have found their liability-matching portfolios to be very cash rich given the way interest rates have moved in recent years.

This has led schemes to look for different opportunities to invest this cash to provide greater diversification, according to Tim Giles, head of UK investment consulting at Aon Hewitt.

“Ultimately, if you can manage your risk and increase your return, why would you not look for opportunities to do that?” he said.