It sounds wrong to think about increasing value for money in pensions by spending more on the management of our money, but that’s what this blog is saying and if your predisposition is to follow Warren Buffet’s advice and invest in an S&P 500 tracker then this blog’s not for you.
I’m not suggesting that savers like me, who don’t have the capacity to pick apart complicated structures and work out whether we are buying the real deal or not, should be investing in illiquids such as property, private equity and credit and other tangible but hard to sell investments. We shouldn’t.
But we pool our money – give it to trustees and insurance companies and we then pay them to manage that money with an eye to maximising the value we get for it. That bit sounds simple, the trouble is that it might mean giving a trustee or insurance company the opportunity to have a good time at our expense – and I mean a really good time! There is a lot of money in workplace pensions and most of it parked in passive pooled funds run by insurance companies , returning the market less management fees. That’s not a very ambitious way forward.;
I went to a conference last week at the General Practitioner’s HQ at 30 Euston Square. It was organised by Hymans Robertson and one of the sessions was about the Future of Illiquids in DC and featured Callum Stewart and Debbie Fielder (who knows nothing about DC but a lot about illiquids). Debbie told us the story of how Clwyd, her local government pension scheme, has built its asset base from £300m to £2.5bn over her time mainly through investment in illiquid assets which the pension fund has bought and held over time. She spoke feelingly about how the cost of the asset management her fund had purchased was high – but pointed to the fact that her various buckets of illiquids – especially her “impact” bucket, made the cost worth it.
I used to go on holiday in Clywd, I remember it for beaches, jellyfish and small cottages which surrounded the mountains – why my family used to hire. It wasn’t a rich place and I imagine the success of the Clwyd Pension Fund has fed through into lower council tax bills and enabled Clywd to run better public services staffed by well pensioned employees. Well that was why I had a little cry when Debbie finished. It was grand to hear how her and her colleague’s conviction had turned out well.
And I thought – in the hall – that the fierce discussion we have on the price of getting into private illiquid markets , is never compared to the benefits to those who live in Clwyd and places like that.
So every time I read that a progressive master trust like Cushon or Smart of Nest has found a way to invest more into productive capital that has the potential to deliver better pensions and impact on where pensions are paid – I will think back to that warm moment on stage – where suddenly it all made sense.
I’m pointing people towards the kind of solutions that are currently out there for DC schemes to use. There is some work on funds and more work on LTAFs’ there are good opportunities with investment trusts and if you want to follow what is going on – you might want to go to Hymans Robertson’s Illiquids Hub from which I’ve nicked this interesting graphic which shows some of the fund structures that allow you to get at illiquids without having to make too much of a change to your scheme