The problem with price – how DC pensions got lost down a rabbit-hole


DC pensions have been down a rabbit hole too long!

A recent blog reported an excellent conversation between Nico Aspinall, Darren Philp and Des Healy – consulting on DC VFM. In the previous pod, Sophia Singleton, a consultant at XPS claimed that larger pension schemes could secure an AMC on a default of 0.2% or less if they could deliver £100m assets to a consolidator’s platform.

Yesterday I spoke with savers in a GPP collectively worth more than £100m paying 0.5%. There is a lot of pride among the 12,000 savers in their company’s benefit program, they run an auto-enrolled payroll savings scheme (sidecar) with 59% take-up from new joiners. The company’s found that those in the sidecar are 70% less likely to opt-out of the workplace pension.

The employer recently negotiated a decrease in the AMC and despite publicizing it , have had little or no feedback from staff. The reality is that people simply don’t relate to costs and charges as a means to measure the VFM of their pensions. This was picked up by Janette Weir when promoting simple pension statements for the DWP. It was not the cost of the pension that savers wanted on their statement, but its value.

So how did we get to obsessed with price?

The simple answer is that we have never worked out “value” to a point where we can argue for high-priced products. That is not to say that pensions haven’t been expensive in the past and if I were to choose between an active diversified growth fund  at 1% pa and a passive global equity fund at 0.2% , I’d need to be convinced that the former had my best interests at heart.

I remember having this conversation a few years ago when it became clear that the DGF was not going to make it under the price cap and it was going to have to go.  Once it went, the scheme that ditched it moved to a view that DC was simply a commodity and the trustees lost all interest,  other than in meeting their obligations.

And many trustees packed it in – large employers like BT and Logica decided to hand over their principle employee benefit to an insurer.  There was talk of AMCs as low as 0.1% and the insurance industry trembled at the loss of value. In truth , the market has not moved on in the past twenty years other than these prices are now being offered by the funders of commercial master trusts rather than contract based personal pensions.

Behind the pricing are the behemoths LGIM, State Street and BlackRock who have dominated the investment of our DC funds for the past two decades. The recent arrival of Vanguard may have slightly widened market choice but effectively DC pensions have frozen out the vast majority of asset managers whose value proposition is based on skill in the selection of stocks rather than the tracking of indices.

Few consumers will shed a tear for the casualties of the commoditization of DC. But it has led to some major problems which are only now emerging.

Firstly – publicly quoted UK equities have suffered.

Time was that UK equities were owned by UK pension funds to such a degree that when DB schemes started closing and de-risking to gilts, the market capitalization of the FTSE indices started shrinking.

At the same time , thinking on DC defaults which had seen early DC pension schemes investing along DB lines, started changing too. Arguments were put forward that DC defaults should diversify and the idea of the 50/50 fund was born (50% UK Equity and 50% global). This has since moved on to “market weights” where the UK Equity market is relegated to an after thought.

Without exchange controls or any form of Government intervention, DC pensions are now tracking world equity markets. By last year , the UK represented less than 4% of global equity

Since price had driven UK DC funds towards a consensus position that tracked maximum diversification at minimum cost, the abdication of DB pension funds from the London Stock Exchange was followed by DC funds. The result is a barely functioning stock market that struggles to keep its core listings or attract new ones.

Secondly – price had left private markets to speculators

The 21st century has seen the rise and rise of alternative asset management, through hedge funds, venture capital, private equity and private credit. These “off piste” investments have become the familiar territory of speculators who have amassed personal fortunes from de-listing publicly quoted companies and investing in start-ups that scale to become some of the UK’s most innovative and fastest growing companies.

DB pension funds have largely missed this investment opportunity, constrained by meeting the strictures of mark to market accounting that has dominated the regulatory agenda – leading to loading up with gilts and shrinking allocations to any kind of growth assets, least of all the illiquid private investments that prove indigestible to the insurers who schemes look to buy them out.

Obsessed by a race to the bottom on price, DC pensions have ignored the huge profits being made in the private markets. The almost total lack of ownership of many of the most successful companies in the UK has been much lamented of late as these companies look to overseas markets to raise further capital. There is insufficient “dry powder” in our pension schemes to supply funding and the UK stock market is considered a bad place to raise money as it lacks institutional purchasers.

Belatedly, the City of London is waking up to the fact that it is not a good place to raise money and everyone from the CEOs of Phoenix and L&G to the Mayor of London is banging on the door of Number 11 Downing Street looking for fiscal encouragement to invest British.

Investing British means coming out of the rabbit hole

Rabbit holes, as well as being comfy for rabbits are often used by other creatures looking to get out of harm’s way. It seems like UK pension funds have been down a rabbit hole for 20 years now.

Coming to the surface – eyes blinking at sunlight – they are now contemplating what it means to invest for growth. It of course means taking risks as they go off-piste from publicly quoted stocks and it means paying a higher price for others to manage assets.

This is uncomfortable for many of our large pension schemes , not least because it is a lot harder to present prices rising than falling.

In the context of the value for money debate, it is also very difficult to convince yourself that a VFM test that relies on “cost and charges” as one of the three threshold tests, is going to set them free from “the problem with price”.

In considering the VFM framework, the DWP may want to reposition “price” away from being a central test and promote “value”to centrality.  Few would complain.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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