Mel Stride is having a go at Rachel. Mel is well known to pension people. He was DWP Minister when Guy Opperman was Pension Minister and he’s stayed on to be shadow chancellor of exchequer.
This is what he has to tell the FT
“Pension funds must be free to make investment decisions based on what’s best for savers.” He added: “The suggestion they should be compelled to invest in what the Labour government wants them to, even if this means leaving their members worse off, is very concerning.”
Big deal.
His criticism of Reeves is weak and his position as a Conservative shadow minister is equally weak. The FT give him air, I will call him for his politically driven remarks which are unbased. If anyone is desperate, it is Mel Stride.
Now to the arguments for a shift to more ambitious investments
Firstly. let’s consider the DC choices offered to savers. With one or two exceptions (Now! being the most famous) DC pensions allow people to invest where they chose to. What Stride is suggesting is that Trustees choose a default fund for savers not wanting to choose (98% of Nest’s 13m savers), a default based not on the future but the past.
On that basis, we should assume Britain is non-investable. Yes British investments have been poor performers (in general) but Brits are not so down on the place than Stride and his Trustees.
Are we to criticise Trustees of these workplace schemes for the returns they would have got had they continued investing the majority of the money overseas?
Are we to compare the returns that would have been achieved by investing in publicly quoted assets when money has been invested in private assets?
Right now, most DC schemes are invested in low engagement passive funds costing a few bps. Whether commercial master trusts and GPPs or the few remaining sponsor specific occupational schemes, the price that is coming out of saver’s pots is the main determinator of “value for money”. Put another way “value is the same however you invest, all that matters is what you pay for management“.
I have argued for several years that we need to determine value by what has been achieved. Alternative strategies can only be measured by discovering what they would have delivered if employed instead of the low cost passive approach generally adopted.
I don’t see much of this historic work going on by the pension industry nor analysis of what the future may be. If we port across the view of TPR’s employer covenant team I see no reason to invest in UK equities, the view is negative.
Mel Stride and the protesting trustees can’t start having a go at Rachel Reeves (and Torsten Bill) for pressing them to return to the kind of strategies that made pensions successful last century. They need to explain why they consider the employers who contribute to UK pensions do not have the covenant to support investment.
Starving UK companies of funds from the flood of new money that has arrived because of auto-enrolment is cuckoo. Almost of all of those companies would welcome public or private financing from the pension schemes into which their staff’s money is invested.
If the schemes invested in are not sufficiently sized then they have no business arguing against investing ambitiously, they should just pack it in and allow a bigger more capable to do the job.
Mel Stride when at the DWP presided over Opperman , Trott and other pension ministers who demanded better VFM through consolidation. The failure of these ministers (and their boss Mel Stride) has led to billions being invested now in overseas equities which are doing savers no good. We are at risk from the wild fluctuations in currencies. The annuity rates and DB valuations are looking rosy right now but we are on the brink in a fall of interest rates, gilt yields and corporate bonds in the UK that will see the full tide recede for us to see the fundamental inadequacy of mark to market valuations.
Rather than complaining about short term valuations , (boosted by low trading costs from indexed funds) , we should be looking at fundamental valuations – as Nest are doing with IVF and as an increasing number of commercial master trusts will as they strive towards sustainable size (£25bn according to the Government).
I will end by reminding readers that the recent run of success of the FTSE100 is not an argument I am using against Stride and Trustees.
But it reminds us that there is nothing inherently the worse about UK economics. If we are to revert to the entrepreneurial mindset that drives our small, medium and large businesses, then we should take a view on investing in our economics and society.
I am very pleased to hear that Oliver Tapper (formerly of AgeWage) is soon to commence at Better Society Capital. It is clearly in the blood. Here’s CEO Stephen Muers, preferable to me than Mel Stride.
It is not true that investing overseas has done pensioners no good. In fact it has done better for them than investing in the UK would have. The question now as a trustee is can we make an argument that investment in the UK will produce higher returns than investing overseas in the future. And that seems to be a seriously impaired prospect given this Chancellor’s other actions, such as NICs.
I am I hope clear that we have not done well investing in the UK these past 20 years. The question is “can we in the next 20 years?”. I don’t think we should answer that by minding some mistakes that may have been made in the last 9 months.
There has always been an argument to overweight UK equities slightly because of higher dividend payouts, but I’m not advocating an income investing approach.
I’d prefer global equity managers to select UK listed companies, or avoid them, on their respective merits compared with global
peers listed elsewhere.
Small pension schemes can’t be expected to be selective over which stocks in an index will do well but we are talking about large schemes now and we pay investment teams not fund managers for pooled funds. We have a crippled investment company sector in the FTSE 250 , surely we should do better than FTSE 100 when as we grow, surely Reeves is right to be more demanding and those criticising living in a different era.
In the scheme of things it’s never going to draw much attention, but why should small pension schemes be limited to index funds and/or passive pooled funds?
True innovation would find ways and means to invest prudently for both yield and growth, rather than just have tunnel vision solutions of consolidation or buyout.
In the 1980s, alongside fellow trustees, we were told that “segregated mandates” were only possible if we had more than £10m to invest.
We got around that particular obstacle, although I presume the entry level today is much, much higher.
Perhaps some of your investment consultant readers may wish to enlighten us?
Derek, purely from experience as a consultant, I’d say that pooled funds are the way forward to small schemes though I know some who have used more ambitious approaches. What’s yours?
You know I fully retired over three years ago, Henry.
But back in the 1980s, when retirement still seemed a little way off, we disagreed politely with consultants who preferred pooled arrangements.
We preferred segregated (bespoke would be a better description), initially for greater transparency and an ability to challenge holdings and omissions.
It’s also easier to access voting rights if you want to use them.
Our view on lower costs in pooled vehicles was that you get what you pay for.
We later discovered that you access more of the income (from every individual asset) than you could get at from pooled vehicles, where accounting rules on distributable reserves mean you have to cover unrealised losses first.
Distributions were also usually once or twice a year at best, whereas with bespoke and a custodian intermediary we could draw down income monthly.
Bespoke means you can set the investment managers targets (absolute returns and/or relative to inflation), hold them to account, prefer more concentrated portfolios.
Diversify the managers and strategic asset allocations, then get out of their way until the next performance review meetings.
Were we being “ambitious”? I don’t think so.
I’ll finish these nostalgic musings with some Ben Graham:
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
“The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists….
But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.
“Investment is most intelligent when it is most businesslike.”
Mel is right but for the wrong reasons.
For 20 years we’ve suffered from Govt interference/mandation in investments through TPR’s coercion over pension schemes to buy gilts under the narrative of de-risking. Mandating now back to (albeit limited) growth is a small step to address the Govt induced market imbalance over gilts. It needs to be done carefully and gradually, and sympathetically to the Govt’s needs not to trash Gilts (ref the recent Calum Cooper Hymans holistic paper on the solution).
It’s not a coincidence that the de-risking mantra both overfunded and aligned pension schemes with insurance levels and type of funding. The ABI has done a truly brilliant job (accepted, unchallenged) for its members in getting TPR to actually think that de-risking was their idea. LOL. If ever a Regulatory or actuarial type talk about “widget makers” etc, you know they’ve swallowed the insurer lexicon hook line and sinker.
VFM – another brilliant piece of insurer spin for “we want to charge more fees”, swallowed by the gullible. That and ‘inadequacy”. With any compulsory pension / saving system the working person is so hugely disadvantaged by the information and knowledge gap that fee caps are an absolutely must have. The pots of money being compulsorily scooped up and the bp basis for fees to insurers is enormous. And it’s a nonsense that it cost 10X more to invest £10m v £1m, or £100m v £10m.
This is really really simple.
Govt could quickly fix all of this by acknowledging that the mission of pension schemes are aligned to long term saving and growth (ie no future growth / insufficient economic output, no second pillar pension. Simple), and that tax enhancements and regulatory protections (and PPF) are only available for Schemes that align to that (national shared) mission. Govt / TPR should state that it is recklessly prudent (aside from being morally selfish) for a scheme to invest on a basis that is more prudent than what the cautious insurers would do. So, the threshold for not being recklessly prudent is that a scheme must invest on a basis of at least G+1.5-1.75%. Someone else can come up with the upper guard rail.
If it ain’t broke, don’t fix. But when it’s seriously broke and compromise, start again, and fix it.
Over to you, Minister. They say you are really rather clever – time to use that; but sometimes it takes more than just big brains to make those difficult decisions, for the public good.
Jnamdoc, I think there’s a world apart from DB – the defaults of DC savings plans which are more interesting to Reeve and Stride because
1. They are not invested in gilts and primarily seeking growth
2. They are highly conservative not investing in UK growth funds but sticking with “diversification” with low cost pooled funds
3. The business of consolidation is relatively easy and the big wins happen when schemes are £25 bn
This is why the immediate attention is on DC and not DB. Stride is wrong about DC, there really is something that can be done in DC while DB schemes are stymied, he may be right to berate Reeve about not sorting out DB but I don’t think that’s what he’s cross about, he wants to protect the insured DC schemes that want to maximise returns while the going’s good.
I guess was more addressing the mandation point.
But consolidation is the antithesis of competition, and getting growth from any form of consolidation will take years, and many investment professionals consider it illusionary. What consolidation can give you (a Govt) quite quickly is control – and that’s the real concern here….
In the DB World, an open appreciation of the damage ( both to member outcomes and the economy) from reckless prudence , and a funding code even a bit more aligned with the urgent national economic priority of growth, would make a meaningful impact, and quickly.