DC pricing- the fund manager’s dilemma

Once upon a time when the world was young and 10% returns fell into your lap like apples in autumn, no one worried about product costs

And then John Denham MP started digging and invented the 1% world of stakeholder pensions.

And he was right to call an end to the skullduggery of with-profits (even if it just morphed into the skullduggery of hedge funds)- the black art of charging everything to the policyholder had to stop – and it did.

And some insurance companies woke up to price constraints and the stupid ones soldiered on till they became extinct.

And the smart ones revamped their admin systems, introduced self-service, STP and paperless offices and cut their admin overhead to next to zero.

And the stupid insurance companies continued to market inefficient proprietary active funds and the smart ones bought passive funds at next to nothing.

And the stupid ones continued to pay commissions untill they were derailed by successive waves of regulation culminating in the RDR 

And the clever ones sold their pensions on a no-load nil commission fee.

So within ten years, the cost of your DC pension fell from 2% per year to about 0.35% per year which, because of the impact of compound interest, is the difference between a rubbish pension and a good pension.

And the stakeholder pension had done its job.

Which is where we’ve got to today. Dirt cheap pensions- no advice- passive defaults and a load of pension people looking around for a job-especially pensions investment people who need a job more than most because they’ve got their kids in private schools and they need £100k pa just to meet their overheads.

Cue the rise of the DC investment consultant, bright-eyed and bushy tailed, fresh from de-risking the last DB portfolio and keen to bring LDI to DC through target dated funds.

Hard luck guys- you missed the boat. If yo want to get your DGFs and LDI based DC defaults and your stochastic models back into play you are going to have to sell that stuff through the insurers.

You’re going to have to ski uphill like a crazed biathlete in Vancouver because you are going to have convince a bunch of employers that they want to tell their employees their pensions aren’t going to be dirt cheap anymore.

And their super low charged passive defaults aren’t the thing anymore.

And in fact the thing to do is to invest in hedge funds and private equity and swaps and all of that.

And this ain’t going to happen.

This ain’t going to happen because you can’t bounce a bowling ball, you can’t ski uphill, you can’t put up the price of a contract based pension.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to DC pricing- the fund manager’s dilemma

  1. Mark H Stanley says:

    Thanks Henry. Excellent piece and good luck with the new venture.

    So where does it go from here? I could be cynical and suggest that part of what the government has been looking to achieve is to reduce the “power” of big pension funds and put it all where it can see it and control it, in a government regulated entity, like Personal Accounts.

    Fortunately, I’m not cynical, but I do fear for the future of effective work placed pensions in an environment where employers seem to be discouraged from providing decent pension schemes.

    DC deserves to have more debate around effective investment options; there’s inevitably been more of a focus on DB over the past 5 years or so as companies seek to resolve what, in some cases, was becoming a significant threat to viability. DC has fallen behind in the meantime while the focus was elsewhere – but it seemed to matter less. After all, the DC schemes were quite small and in many cases, senior management weren’t in them.

    But for all the debate about investment options, the two biggest challenges are 1, getting people to join in the first place and 2, contributing enough. The first can be resolved through auto enrollment – but the second is a different matter altogether and I don’t see that being solved through Personal Accounts.



  2. henry tapper says:

    Thanks for this comment Mark.

    You are spot on in your analysis. Take up rates and contribution rates in workplace pensions are not keeping up with the falling support people will receive both from state and occupational DB pensions. Although people are better off in terms of housing equity , we should all be worried about the lack of income that many will experience because of disillusionment with pension savings.

    While some large occupational DC schemes have innovated and adopted sound fund governance structures, the majority of DC schemes have not prioritised DC investments with senior managment and trustees concentrating their efforts on DB liabilities.

    PADA has initiated a strong debate on this issue and the DWP have started a process that should require the large DC “operators” (the insurers of personal pensions) to review DC investments and in particular default investment options.

    My blog concentrated on one particular issue, the barriers in place that hinder upgrades in fund governance. Many fund managers looking to enter the DC market have simply not done their homework and there needs to be a better dialogue between the asset managers and the “operators” if we see these DC products taking hold.

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