One of my favorite blogs of 2022 is one where Stefan Lundberg concludes
No matter what, the key responsibility of the pension industry, must be to help our savers to get the most out of what they already have.
This requires us to exercise some self-control on our saviour complex and push the adequacy question back to the politicians.
In investment portfolios, we need to focus on real world impact, rather than hunting for ‘likes’ in the various industry echo chambers. This requires us to step away from tracking benchmarks and start investing with impact.
This would be a small step for the pension industry, but a giant leap for the planet.
The “savior complex” , aka “Messiah or Christ complex” s a state of mind in which an individual holds a belief that they are destined to become a savior today or in the near future. The term can also refer to a state of mind in which an individual believes that they are responsible for saving or assisting others.
Stefan argues that us compassionate people, hunt for “likes” by reinforcing consensus, rather than getting things done. I quite agree that we cannot control the flows of money into pensions , we can’t create a need for sustainable investments and we can’t encourage people to manage their retirement cashflows as their own CIO and personal actuary.
Camouflage
A lot of what is said on these subjects is simply camouflage to hide the lack of genuine invention within the organisations who sponsor internal and external think-tanks and commission exhaustive reports explaining what the problem is without demanding action.
For instance, it is quite within the pension industry’s power to break the hegemony of the AMC as the measure of value in workplace pensions and move to a measure of value that looks at the impact of cost relative to the outcomes members are getting.
The measure of success for most pension providers is its ability to increase contribution flows and ultimately funds under management. This is why “adequacy” is such an issue. The Government are well aware of the ulterior motives of those demanding more by way of contributions and also know that by ratcheting up the nudge on AE contributions, it would be restricting its capacity to increase taxation to meet unfunded obligations such as the maintenance of the triple lock.
The launch of a a genuine impact investment – such as Disruptive Capital’s “Long Term Asset” fund, is rare, instead – the industry is swamped by identikit funds that track indices purporting to deliver impact by re-arranging deckchairs on the titanic. Frankly we will not solve the climate problem by tilting our investments in the major public markets. Most of our efforts so far to “make our money matter” have been little more than camouflage for a bankrupt moral vision. We can sign up to all the codes and reporting standards available but unless we break the hegemony of price and focus on value, we will not make progress.
The finger points here firmly at the consultants who know very well that money spent on fund management comes from the same pot as money spent on advisory fees. Wealth managers use the cheapest routes to market just as institutional investment managers. The LDI blow-up is increasingly being blamed on consultants who it is thought made money on selling LDI funds – this is not the case. The LDI funds were generally implemented to maximise the bang for the client’s buck, but the bang came from money freed up , not just for “growth assets” , but for high value (eg expensive) consulting that went with it. Corporates are unlikely to query advisory bills so long as sponsor funding is under control. LDI created the perfect conditions for investment consultants to maintain their margins.
The same can be said for what little money consultants have been able to squeeze out of the DC budget. In the absence of any reliable measure of value, the use of the AMC paid by members is , for most DC schemes, the most tangible measure of a consultancy doing its job. Screwing down the AMC on the default fund has become such a preoccupation because it creates the budget for high-value engagement programs which generally involve financial education or “well-being” seminars. Against such competition, the incorporation of genuine innovation into defaults , innovation that overtly increases AMCs , is a stretch.
So “impact-washing” and “green-washing” go hand in hand, they are not genuine signals of “virtue”, they are camouflage for the same old , same old. As Stefan asks…
Are you wondering why most user experiences and basic services from pension funds feels like they are from the 20th century?
Who pays the bills?
For all the talk of “adequacy”, the common purpose of pension funds which is to provide savers with dignity through income in retirement is little considered. The noble attempt by the PLSA to define value in terms of retirement living standards boils down to conversations about the size of the pot. Indeed the living standards we have in retirement are dependent not on private but public pensions.
The abject failure of the DC consulting , provider and funds industry to find a method for converting pots into pensions is becoming a disgrace. It looks as if Government will have to intervene as it did in Australia and create a Retirement Income Covenant” in the UK.
Once again, the problems for this are woven into the commercials of the advisory process. The sponsorship of institutional consultancy are not the members but the employers who use consultants to improve the employee benefit.
The employee benefit is relevant to employees, not ex-employees – whether employees are ex due to moving jobs or retiring. It took Government intervention to rid ourselves of the “active member discount”, which was a cross subsidy from those who left to those who stayed but this cross subsidy remains embedded in the system.
The reason that we have had so little progress in finding a replacement for the guaranteed annuity is because there is no money in it for employer or consultant. And there is a great deal of money in it for the provider, who hangs on to funds under management to and through retirement without having to do much more than send out an annual statement.
Implementing an alternative to annuities which involves “risk sharing” rather than “risk transfer” is only going to happen when member outcomes are measured by income in retirement , not by assets under management (or advice).
The “savior complex” is bogus
Much of the narrative that surrounds “adequacy”, “sustainability”, “social impact” and “outcomes” is bogus.
It is up to Government to cut through the crap and assure that we get the most out of the money we commit to private pensions, whether the “we” is an employer or a “saver”.
It is not for the pensions industry to pretend it is the consumer’s champion, it’s job is to deliver the dignity in retirement that savers sacrifice pay today for.
Stefan is right, though he is far too nice to put it in these terms. Less “virtue signalling” please, let’s have some of the improvements flagged in this blog , delivered in the next two years please.
