Refocusing the industry on the purpose of finance could deliver huge benefits to UK pensions, a new academic paper has suggested, as calls were lodged for the resurrection of collective defined contribution.
Policy-makers and industry groups have been addressing the nation’s costly defined benefit deficits and inadequate DC savings for some time.
But according to David Pitt-Watson, executive fellow of finance at the London Business School, and Hari Mann, professor of strategy and innovation at Ashridge Business School, the answer lies in tackling the broader failings of the financial system.
The reason why the industry has been able to behave in that way is because the consumer can’t see what’s going on
Andy Agathangelou, Transparency Task Force
The pair developed their own hypothesis on 'The Purpose of Finance', launched in partnership with the Pension Insurance Corporation. It stated that finance serves to safeguard assets, facilitate payments, mitigate risk, and intermediate between users and suppliers of money.
With finance professor Thomas Philippon from NYU Stern School of Business finding that financial services productivity has not grown over 130 years, the paper concluded that markets and competition have not efficiently carried out their four purposes.
The key inhibitors of productivity were an asymmetry of knowledge and a lack of fiduciary duty, the authors concluded. But instead of “whack-a-mole” regulation, Pitt-Watson and Mann advocated “the establishment of ‘fit for purpose’ institutions”.
The paper also suggested that converting the prevailing DC system into a more “purposeful” CDC environment could boost productivity by between 30 and 40 per cent.
But some were sceptical of the merits of the arrangement. “It could only really work with compulsion because those who would lose out in collective DC would opt out of it,” said Richard Butcher, managing director of PTL, adding that a return to a watered-down version of DB looked more likely.
Opacity v responsibility
Others said opacity was the main problem. “The reason why the industry has been able to behave in that way is because the consumer can’t see what’s going on,” said Andy Agathangelou, founding chair of the Transparency Task Force.
He expected the Financial Conduct Authority’s asset management market review and referral of investment consultancy to the Competition and Markets Authority to empower consumers and trustees to hold managers to account and called for a form of statutory duty to be placed on advisers.
Increased transparency is undoubtedly welcome, argued Mark Smith, partner at law firm Taylor Wessing, but the extension of a fiduciary duty beyond trustees raises complications.
FCA wants to strengthen duty on managers and consultants
About £109bn of investor assets is held by managers who charge high fees but do not offer significant variation from an index-tracking strategy, the Financial Conduct Authority’s interim report on competition in the asset management market has found.
“The person with responsibility for the investments is ultimately... the legal owner of the assets being invested, and there’s a regulated and sophisticated market out there,” he said.
With good-quality advice available to diligent schemes, he said it was up to trustees to admit the limits of their knowledge and proactively educate themselves, rather than forcing the industry into conflict with its commercial aims.
