Toby Nangle

In this blog, I argue that fund management is one lever but not the key to solving systemic problems in pensions and the wider economy. Consolidation of funds may bring marginal improvements to the economy and fund performance, but the real benefits of bringing funds together are based on “pension”  management.

@toby_n finds the case for pension fund consolidation is not based on what we expected. #stewardship https://t.co/IsuQOzyogO

— Henry Tapper (@henryhtapper) August 30, 2023

Nangle speaks like the insider that he is, assuming that

Greater economies of scale would allow them (larger pension funds) to reduce average costs while also being able to afford to attract top talent, run state of the art risk systems and build in-house private market teams.

He finds the theoretical case that “small is beautiful” is thin

arguments against amalgamation can sound like special pleading from fund managers keen not to see their revenues shrink. And the prospective hit to their revenues is not trivial.

But what Toby Nagle is actually finding from his research is that there is little or no correlation between the size of pension fund and its performance.  This suggests that the Chancellor may be barking up the wrong tree with his Mansion House reforms. He cites American Public Sector Plans

He also hints that large UK DC plans (typically master trust defaults) aren’t pulling ahead as we might expect.

Nor can he find much evidence that “size matters” in the  OECD  “Pensions at a Glance” data. Credit Nangle here for his integrity.

When an expert goes out looking for the evidence to support a generally accepted theory, and finds none, then we should sit up and take note.

And we should ask, as Nagle goes on to ask, “why aren’t big funds pulling away?”

Frustrated by the lack of empirical evidence that size brings value, Nangle turns to research from the Resolution Foundation that finds that the underlying malaise in UK stocks (which have underperformed overseas equivalents has come about because there is a lack of concerted activism from asset owners.

diffuse ownership has impeded  performance by weakening UK business owners’ engagement over the past two decades.

British  stocks no longer benefit from the expertise of asset managers

Activist equity managers have seen their powers ebb with successive waves of clients allocating away from them towards liability-matching bonds or passive exposures.

Because asset managers no longer invest in British stocks

Hence, UK firms possess the OECD’s lowest share of “blockholder” shareholders capable of wielding substantial decision-making influence, according to Resolution. Consolidation could boost fund managers’ voices and ability to push for investment.

A fund manager arguing that fund managers should have more sway over the management of British companies, may sound like another case for the special pleading that Nangle elsewhere criticises.

But he gets the support of Border to Border ‘s Ryan Boothroyd

We look forward to seeing these benefits feeding through over time. I have already posted on the excellence of Border to Coast’s asset management but this seems hard for  other pension funds to replicate.

Is better stewardship the answer?

And the problem with this argument is that it is speculative.  We have yet to see what difference a substantial allocation to UK equities would make and it is a leap in the dark for pension schemes to assume that they can revive Britain’s flagging economy with their money and the expertise of in- house or outsourced fund managers.

Nangle is actually saying that consolidation cannot be justified purely on grounds of “value for money”. This is a sad indictment of  dedicated fund managers who can’t seem to make their muscle and expertise count.

If large pension schemes were to become their own fund managers- as happened in yesteryear, then things could be different. This rather ignores the recent trend to outsource the in-house CIO to large fund managers such as Schroders and BlackRock.

The proposition would probably require management of equity positions to move in-house in these new larger pools of capital to overcome well-documented incentives for external fund managers to underinvest in stewardship.

Nangle’s argument is ultimately that consolidation only works when the emphasis is on improving asset performance through asset management. The incentives of the asset manager must be aligned to improving outcomes not just for members, but for those in the invested companies and ultimately the economy in general

Policymakers have hitherto sought to increase value for pension scheme members by reducing costs. Given that only the latter can be controlled, this approach is understandable. Implemented correctly, the move to create larger pools of pension capital could, however, be the catalyst to unlock value for all.

His  argument for consolidation relies on  the long-term improvements it would bring to member outcomes and the more immediate improvements it would make to the productivity of British Companies.

Any benefits would, furthermore, be shared across the whole economy. As such, this seems a reasonable aim for the government.

This would suggest that the Chancellor will need to bark not just at the trees, but at the right trees. This sounds a big ask for a non-interventionist state function.

Consolidation is about improving pensions, not just asset management

After reading Toby Nangle’s article, I am even  less convinced that the Mansion House reforms can be justified  by the improvements that can be made in fund and asset management

I am more convinced that freeing up resource applied to the management of single sponsor schemes, can improve an employer’s ability to allocate the right level of contributions to sorting out the evident deficiencies of our workplace pensions.

Ironically, in this – the recent improvements in pension solvency, which have very little to do with fund management, are the Chancellor’s best ally.

We need to see a sustained period of investment in long-term assets , properly managed by trustees and asset managers with an eye on the same prize. We cannot go back to the mistakes of the past where we manage outcomes by fixating on the present value of the liabilities. We must invest in stewardship, and in the sustainability of the growth our savers need.

These big ticket items can happen , if the focus is on a handful of properly managed pension schemes, they cannot be achieved with the current structure where value is so dissipated through inefficiencies. But the big wins in consolidation come from the business of creating and maintaining pensions, of which the investment solution is just a part

Ultimately, VFM isn’t just a performance problem, it’s about the sustainability of the system . Consolidation is more than a fund management issue, it’s about the proper management of pensions of which the asset management is just a part. Without consolidation , we simply can’t sustain the value for money pensions we promise ourselves.