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Important
Issues for Fund Managers When Managing Stakeholder / Money Purchase
Pension Funds (All material on this page is subject to copyright and must not be reproduced without the author's permission.) Investment
Issues for Money Purchase Pensions The
important issues to bear in mind when talking about DC pensions are
that the eventual size of the pension will depend on four factors:
The relevant fund management issues are obviously the investment returns and charges. Investing
for Stakeholder or Money Purchase Pensions is Different from Final
Salary Schemes From
the point of view of the fund manager, one of the big differences
between managing DB and DC pensions is that of pooling. To
manage £10million in a DB pension fund, the manager is running
money for one owner, just one pot of money, with one valuation, one
investment profile and so on. To manage £10million in a DC
arrangement, there could be thousands of different owners, who may
not all want the same investment profile, who may all choose
different combinations of underlying funds, who may change
investment choices frequently, may need separate valuations etc.
This suggests that the more successful fund management houses for DC
need very good back office and administration systems, which can
cope with such demands. Need
Good Default Options One
of the most important issues, which has not yet been properly
addressed by the fund management industry, is to provide a decent
range of default options for DC pensions. There is typically
only the ‘lifestyling' option available as a default (or
sometimes a ‘balanced-managed' or even ‘with-profits' fund)
but this does not offer sufficient scope for the wide range of
members who may be in the schemes. It would be very useful to
develop a range of default options to suit different circumstances
– for example different funds to suit people of different age
groups, funds to cater for members with different risk appetites,
funds which allowed people to balance the rest of their
‘non-pension' financial assets with assets which were missing
from their overall portfolio (for example if all a member's
‘non-pension' wealth is held in property, their pension probably
should not be invested in this, but if the member does not own any
property, perhaps their pension fund should do so). The
standard ‘lifestyling' option of switching to 100% bonds by
retirement age may be completely inappropriate for someone who is
intending to go into draw-down when they retire, instead of buying
an annuity and will then just have to buy back equities again. I
certainly think that, if such default options were developed, they
could include both hedge funds and private equity as part of one of
the options. Some people may be keen to invest in these assets
and a balanced portfolio containing some ‘higher risk, higher
return' private equity and some market neutral or absolute return
hedge funds to offer some risk reduction and diversification
benefits. Why
Not Benefit From Economies Of Scale By Pooling? This
leads on to the obvious issue of grouping plans to achieve much
better economies of scale. One of the big problems with
personal pensions and stakeholder plans is that they have to be run
one by one (except group schemes perhaps). This means that
there are no economies of scale for the manager, or for the member.
If the plans were pooled – by industry, by affinity group, by
region or whatever, then the fund managers would be more interested
in managing the bigger pools of money and consumers would benefit
from lower charges and better buying power. An affinity group
or industry representative could negotiate on behalf of consumers
who may not know how to do so themselves, or may not have the power
to do so. Beware
Of Fees This
also leads on to another important issue, namely fees. Even if
one achieves very good investment performance, high fees can detract
significantly from this and reduce the size of the final pension
substantially. It is important to ensure that fees and charges
are as low as possible, but commensurate with reliable running of
the money. It is important to consider ALL charges –
stakeholder 1% only covers the actual management fee, but other
deductions may be made for dealing costs, administration fees and so
on. In fact, it is usually the case that the lowest charges
would be for passively managed index tracking investments and active
managers need to outperform their benchmark index by more than the
fees they charge – which has often not been the case. More
Emphasis On Information And Education For Members Finally,
I do think it is important that we start to try to focus on the
quality of the information for members. This is an aspect
which was really not important for DB plans, but for DC schemes it
is much more relevant. The individual members will not
understand investment issues, the reporting should be in a format
that ordinary people can understand, brochure and fund descriptions
should also be written with the member in mind, rather than for
trustees or a finance director. If I were a pension fund
trustee or company, choosing a manager to run the funds for the
members in my firm or affinity group, I would focus on the quality
of materials I could use for the members as well as investment
performance and fees. Fund management firms have not really
geared up much for any of these requirements, but information on
financial planning, web-based tools or even offering seminars on how
to decide how much to contribute and what funds to invest in, would
be extremely useful for improving the workings of DC in the UK. |
