I’m listening to Bruce Springsteen – “no retreat, baby no surrender”
A useful note about “the consolidation opportunity” sits in my inbox. It’s from Con Keating who had been studying the ONS data on how pension schemes invest their money. He concludes small schemes have already consolidated, they have yet to reap the consolidation premium. This blog looks at five ways that trustees of small schemes can win- without surrendering to Superfunds!
I keep hearing that there are enormous gains to be made from pooling pension scheme investments – cheaper fees as a result of economies of scale.
The ONS MQ5 data series contain aggregate information on scheme investments – though it should be noted that the sample used is large scheme biased, and in-house management is more prevalent among those schemes than in the small.
The total long-term assets are £1,473 billion at the latest date available (end 2015)- Corporate securities account for £903 billion of this. Of these £499 billion are held in mutual funds of one form or another.
These schemes hold just £84 billion in UK ordinary shares and £169 billion in overseas ordinary shares. These are self-managed or in segregated accounts.
Other assets, such as linkers (£195 billion) and insurance policies (£134 billion), account for the £570 billion difference.
If the £300 billion or so of small pension scheme assets not captured by the ONS sample were similarly distributed, then they would hold £183 billion of corporate securities of which £101 billion would already be in mutual vehicles. In my experience, smaller schemes actually hold far more in mutual vehicles than are self-managed or in segregated accounts.
The consolidation “opportunity” appears to be rather small in amount and as a proportion of scheme assets.
Should we conclude from this , that there is no opportunity to reduced the cost and improve the efficiency of how small schemes are run? The answer of course is no!
Scheme Consolidation is not the only way to achieve efficiencies. So far, the PLSA has been allowed the assumption that superfunds are the way to “super-value”. Let me quickly five other ways small schemes can get big value.
Here are five top tips for trustees who don’t want to be consolidated.
- Hire a practical investment consultant who thinks about your funding before his/her getting paid. These are rare beasts, almost instinct among the big three, but they exist and I know a few (if you’re asking).
- Get your strategy right, before implementation – asset allocation trumps the “hunt for alpha”.
- Remember Buffet! Very few investors are capable of beating the market over a long-term; unless you can understand how an active manager you are employing, will outperform the market index, invest in the market index.
- Benchmark your fees, big schemes think they have favoured nation status, but I have sold to all kinds of schemes and the ones I liked to most are those who don’t check what they are paying with others. Do not sign NDAs, your adviser should be working with you to drive down costs (remembering that you are paying a lot more than what’s in that AMC).
- Consider platforms. The best fund platforms such as Mobius and LGIMs offer great deals on funds. They are today’s consolidators. Not only can they bring you funds at better prices than you might buy direct, but they can offer investment administration at considerable discount.
What we can learn from Con’s note is that we already have consolidation , through pooled funds; the ONS statistics suggest that the inefficiencies are in our failing to get best value out of what we’ve got. The answer is not in retreat – nor in surrender!