On the face of it, the gating of the Woodford Equity Income (WEI) fund is bad news. But how many pension funds have exposure to it? I know of one or two fund platforms but for the vast majority of employers and trustees, exposure of staff and member pension pots to WEI will be non-existent.
The reason is that most trustees, providers and IGCs have stuck to offering straightforward investment funds that do not invest through the Guernsey Stock Exchange and don’t charge members well in excess of the 0.75% charge cap.
Staff and members who had the option to invest in WEI would have done so well away from core funds. In ski-ing terms, they would be well off-piste.
There are a number of reasons why the funds we offer to our members do not suffer the issues facing WEI. To begin with, we are increasingly wary of the risks associated with active funds, especially funds run by star managers.
Between them Nick Train, Terry Smith and Neil Woodford took £105m* in remuneration in the last year, if nothing else that represents questionable governance. If Lindsell Train, Fundsmith and WEI pay their managers to these levels – it must reflect the personal risks taken by the managers. We have seen that since the gates have come down – the Woodford rake has not reduced. It would seem that active managers get paid the same whether active or not.
Secondly, we do not except illiquidity. The funds we employ within our defaults and core funds are daily priced and offer full liquidity to our staff and members. There are occasions where core funds have been gated – property funds and even cash funds (at the time of the financial crisis), but these are very rarely included in core fund ranges offered to DC savers.
Finally, we do not buy active managers as offering value for their money, at least not to the mass market. Where active managers are successful, they do so as boutiques. When active managers go large, they tend at best to turn into closet trackers and at worse blow-up, as GARS has blown up. The issues related to buying and selling stocks in mega-sized active funds are that those on the other side of the trade see you coming. Passive managers have evolved sophisticated ways of managing transaction risks which are beyond the scope of most active managers.
So the reason we do not find Woodford’s WEI in our defaults is because however boring it might sound, we do take care not to mess around with other people’s money. I think we take this for granted but – and this is the point of this article – those who we run our pension schemes for – our staff and members – don’t know this.
Many of your members and staff will be worrying (quite needlessly) whether they are invested in Woodford. Have you asked your platform manager whether they have? If you have, you need to know. If however you have no exposure to Woodford, then tell them.
Not only should they know the good news, but they should know why they have that good news. It is because you – as an employer or trustee, chose choice architecture that did not expose money that came from your payroll in a poorly governed, illiquid and expensive fund option.
Now seems a very good time to explain to your staff / members why they are invested in the default they are and what the other fund options available to them are. There is no better time to engage staff with the investment of their savings than when they’re relieved of anxiety.
Woodford is a chance for those of us involved in workplace pensions to shine.
*source – Daily Mail – this is money Woodford £23.7m, Train and Smith £81.2m
Thisismoney.co.uk “How three of Britain’s best known fund bosses pocketed 105m between them”
This article first appeared under my name in Professional Pensions and can be accessed in that context here