A key aim for DC trustees should be to consider how to ‘further improve’ long term future net risk adjusted returns and ‘member outcomes’ rather than just cutting costs. Getting more for members! @GuyOpperman @DWP @TPRgovuk @TheFCA @ThePLSA @bankofengland @henryhtapper https://t.co/An74XlNYfw

— Ruston Smith (@RustonSmith1) September 28, 2021

It is good that the focus of the debate on value for money is focusing on member outcomes but we should not be blinded by the luster of fools gold. Not all that happens behind the veil of private markets is in the member’s interest and we need the cold analytic skills of academic discipline to ensure that what is extracted by private funds and their asset managers, does not leave members short-changed.

Chris Sier  has argued that members of DC schemes should not be exposed to private markets in their current state and he should know. My friend Con Keating is of the same opinion, telling me that the publication produced by the Productive Capital Group this week falls far short of the rigorous standards that would be expected from an academic paper.

There are few truly independent voices in this argument. Most industry experts have personal risk capital tied up in this argument. Either they are fiduciaries, with responsibility to members or they are suppliers to fiduciaries with responsibilities to shareholders. Government is good at sensing vested interests and of identifying hidden motives. (they would say that wouldn’t they).

But we should not be overly cynical. There is a strong fundamental argument for investment in the various private markets based on the usual laws of supply and demand and a strong argument that Britain is a good place to invest. Being patriotic is not a bad thing, we live here and so do the people we serve.

These arguments are laid out in the second chapter of the Roadmap for increasing productive finance investment.

They are based on American research which looks out of date and I am sure that they could be better presented

But I don’t fundamentally disagree. John Kay wrote recently in Prospect an article called “RIP PLC; the rise of the ghost corporation”

John Kay

He charted the ascent and demise of the listed company, and where—for better or worse—private equity will lead business next.

Kay sees the public limited company as the “creature of the 20th Century while Amazon and Google represent “capitalism without the capital”.

A paradox of the last 40 years is that, as capital has become less and less important to business, the finance sector has grown in size and especially remuneration. Kay is nervous that the private markets offer the finance sector too easy an opportunity to divert value to themselves. Anyone who has been involved in raising venture capital will be aware that there are more sharks than dolphins in the water

But Kay is not entirely negative about the role of the financial services indusry. Indeed he sees the role of the private equity as “search and stewardship”.

“..private equity at its best can be very good at fulfilling those key functions of search and stewardship. If TalkTalk really does need to find the right investors for, say, laying miles of fibreoptic cable that will only pay back over decades, or else genuinely requires stewarding through a particularly tricky period of technical change, it is conceivable that a private equity model could help. And it is by focusing on search and stewardship that we can also find the right path to the broader future”

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A jewel in the crown or fool’s gold?

If Kay is right, so are the Productive Capital Group. We cannot go on investing the majority of our workplace pension defaults solely in public listed equities and bonds. They do not have the need for our money while there is insistent need for capital from firms as small as ClearGlass and AgeWage to as substantial as Monzo and Talk Talk.

There is of course risk here and we know of those risks through what goes wrong. Woodford. Woodford was a failure of governance and or regulation and I hope it has taught many lessons. I know that if Woodford had been under the scrutiny of the eyes of academics such as Keating, Kay , Sier, Tilba and Clacher, it would have developed in different ways. There are a number of articles on this blog pointing to the risks of including private equity in DC defaults. I’d choose this one to start with.

Our hope is that the key figures wanting to develop private markets – Mark Fawcett and Paul Todd at Nest , Nico Aspinall at Peoples (soon to be at Connect), Darren Agomber at Smart and Maria Nazrovia- Doyle at LBG, will find a way to convert capital into better outcomes. But they will need the sharp eye of the academics to ensure success.

I hope to publish the counter-arguments to the sentiments expressed in the Roadmap later this week. The debate about value for money in our long term investments is a thrilling debate.

Discuss this with us on the afternoon of October 22nd.

I am pleased that Ruston Smith  and Janette Weir will be talking at our event on VFM on 22nd October, I hope to include a panel of narky old academics to add some vinegar to the dish. The event will be from 2pm to 4pm and is open to anyone with an interest in improving member outcomes in the DC markets.

You can register for an afternoon discussing these issues here.

Whether “public” or “private,” the fundamental shift needed is to recognise that modern role of business. – John Kay