I was perplexed that the article “UK pension schemes waste billions on underperforming asset managers” got published in Financial Times. Not because I believe that disclosures about fees and charges are sufficient, they’re not and should be materially improved. But because outside of the flashy headline, the arguments and conclusions presented in the article lack substance and understanding of both DB pension schemes and asset managers. The author failed to realize that pension schemes decisions are often not entirely up to them even if they source the best external advice. Furthermore, the pension scheme lifecycle and liabilities profile matters when talking about costs and performance, and that one can’t talk about performance in the absence of risk. But let me elaborate.
Firstly the lack of assets in smaller DB pension schemes often does not offer attractive fee returns to the top-performing asset managers, meaning those pension schemes have to go for Tier 2 or 3 asset managers by default, not by choice. While it’s not a given that a smaller asset manager will have to underperform, admittedly, a lack of scale has ramifications on asset manager operational efficiency, technology, and human capital spending, consequently impacting investment returns and fees they charge. Therefore, a small DB pension scheme often ends up with the worst combination of cost and performance.
Secondly, a liability profile of a pension scheme differs. Asset allocation varies depending on the lifecycle of the pension scheme and expected cash outflows, among other factors. Talking about the asset performance in the absence of understanding liabilities and risk profile of a pension scheme leads to not directly comparable outcomes. Including some factual evidence from the ClearGlass study could make the arguments persuasive.
Finally, the author talks about cost and performance in various fund categories but omits any reference to a risk profile of those funds. For a meaningful comparison, risk-weighted performance should be considered.
In conclusion, while I wholeheartedly agree that the creation of standard disclosures for investment costs and performance measurement/calculation would empower better decision making by pension schemes, it would not solve the cost/performance problem for all of them. The pension scheme needs scale; otherwise, their asset won’t become attractive for top-performing asset managers, and their fee negotiation power will be limited. But even if all DB pension schemes can offer attractive absolute fees (and lower relative fees) to an asset manager, you don’t want all that money to be controlled by the 3-4 largest asset managers. I believe the solution to the cost/performance problem is empowerment through technology.
Based on my experience, deploying Fintech technology into critical investment and operational processes at both pension schemes and smaller asset managers, one can achieve better risk-weighted performance and operational costs reductions. At the same time, avoid systematic risks created if most of DB pension assets are managed by a few largest asset managers.
