Phoenix’s heritage

Phoenix are rightly taking some stick for suggesting that the young should pay more for their pension investment than the old.

It would be hard to present an argument in a worse way than Phoenix/Standard Life’s PR team have managed to do.

Since its submission is not publicised, we have only the FT’s reporting to go on and , while she is too good a journo to say so, Jo Cumbo solicits a precise and universal condemnation of a strategy that totally misses the point of a pension plan.

Asset managers are our employees.

Investing in illiquid assets costs more than investing in liquid markets.  But this is not because it is expensive to take risk – it costs the same to bet on a horse at 25-1 as 2-1, it is because the cost of the management of the asset is higher. Managing an ETF that is a derivative of an equity market index has virtually no cost, managing investment into a bunch of start ups , is super expensive. People pay for the due diligence that reduces the chance of picking a loser from 95% to 85% because the 10% of winners found can include a unicorn.  What you are paying for is access to winners and you pay someone else because you can’t be bothered to do the research yourself.

So paying a lot to get a lot is not a bad thing. And if you are – like Phoenix, sitting on £300,000,000,000 of other people’s money – you can force the price of managing those assets down through bulk purchasing – going to the cash and carry not Marks and Spencer. This is how the platforms that insurer’s use, reduce the risk of the management of an investment , extinguishing its value.

We learn from Phoenix’s latest public reporting that it is taking the first tiny steps to return to direct asset management

The continued development of our in-house asset management capability has enabled us to increase our illiquid asset origination by 67% year-on-year to £1.3 billion. Importantly, nearly £0.8 billion of this was long-term investment into ESG-related assets, more than doubling our investment in sustainable assets year-on-year.

But – unlike their big rivals L&G and Aviva, Phoenix is not primarily in the game of managing assets directly , it employs others to do that. So this blog is about how you assert yourself on your suppliers to ensure you are getting top value for your saver’s money.

Thinking of the price cap as insurance

The Government established the charge cap because it thought that firms like Standard Life could afford to buy asset management and manage the member’s experience for a fee of 0.75% and that a competitive market would mean the cost could be a lot lower. Now the Government is re-thinking “0.75%”, because it is being told that the real cost of investing in productive finance is much greater than just buying a bunch of ETFs. It is.

But the deal we make with Phoenix is that they make sure  we have a fighting chance of getting a decent share of the profits being made by productive finance without intermediaries taking the lion’s share of the action. So experts would like to cap not just the platform fees (what Standard Life pass on) but the performance fees of those who manage the money.

This is entirely reasonable. The only risks that private equity managers are taking are that no one buys their management. If Phoenix provides them with a regular annuity stream from our money, then performance fees are the cream on the cake. There is a limit to the amount of calories that we should spread over that private equity cake.

But Phoenix/Standard Life seem to have made up their mind that they can’t impose any kind of cap on the fees extracted by the asset managers they employ and that they are as much a hostage to the private markets as the private investor – something which I push back on very hard. If £300bn isn’t enough for the private equity managers, what is?

It is time that those who manage in the private markets started taking some risk and started thinking of themselves as employees of the people whose money they manage (rather than the people who really do put their balls on the block to build businesses).

The price cap should be Phoenix’s negotiating tool , it insures policyholders against egregious behaviour of intermediaries. Phoenix appears to be aligning itself with its intermediaries. Could they be next in line for consolidation?

Phoenix is supposed to be managing these employees.

It’s time that the CIOs of the big workplace platforms started acting as our agents and not as the agents of those managing private funds. This is fundamental to governance. If we expect good governance from the executives of public listed markets, we should expect good governance from the private markets – and that means transparency as to what is being taken out of investments by the likes of  Blackstone and CVC as well as  young pretenders like Gresham House and Impax and start-ups like Connected.

The challenge to Phoenix an Standard Life’s master trustees, IGCs and platform managers is to exert some serious control over the behavior of the executives of the companies they own and of the asset managers they sub-contract this control to. When you have £300bn of other people’s money, you take that responsibility and you make the clout it gives you stick.

But isn’t Phoenix failing its customers?

Phoenix is saying that it cannot manage private market money within a 0.75% price cap. This is an admission of failure. It has conceded to private equity/debt and infrastructure managers a critical negotiating position which has been given them by the price cap.

But it is so much easier to give in to these managers than to their savers, because the millions of savers who will be impacted by higher fees have no negotiating position at all, they are lambs to the slaughter.

And isn’t Phoenix  abandoning its duty as an insurer?

The duty of an insurer, which Phoenix is, is to spread risk. Older people pay more in ad-valorem fees because they paid less when they were young. This is the principal behind “ad valorem fees”. An insurer can assume that the money managed for a 20 year old can be managed at the same percentage cost as for a 60 year old because they have a contract that keeps the money with them for 40 years +. So when youngsters start out, they get a subsidy from their parents which they repay when they get decent funds of their own. This is why workplace defaults do not reduce in price the older you get. It’s called insurance and it’s about spreading risk in a fair way.

Now, an insurer wants to abandon that principle and get young people to pay the cost of their fund management as if they were the only people in the default fund. In the process, the default fund becomes two funds or perhaps several, as the concept of a single annual management charge is splintered into age-segmented charges. Once you have conceded this principle on fund management, you would have to concede it on member costs. The cost of managing the small pot of a youngster is higher proportionally to the cost of managing a large pot, why not load the youngsters with their pot management costs too?

Phoenix needs to remember that insurance is all about the sharing of risk. Phoenix is not just a platform manager, it is an insurer that runs money on platforms.

Phoenix – speak for your customers – not your suppliers and shareholders!

As Britain’s leading pension insurer, Phoenix has a primary duty of care to its customers. If it treats its customers fairly , it will treat its shareholder’s fairly, but in that order.

As an insurer with £300bn of our money at its disposal, Phoenix should be fighting a few battles on our behalf. Robin , Mick and Steve Webb are right. This hopeless capitulation to the Government, the private market managers and its shareholder’s interests, shows Phoenix as unconfident and lacking in governmental rigour .

Andy Briggs and Andy Curran are better than that. They should take a grip of what is being said to Government and push back. If Phoenix can’t – who can?

Re light that fire!