It would be nice to think that those who run the DC defaults we are invested in would be worrying about the threats to member pots coming from the threats to the mega stocks in which we are generally invested. But our funds are not run like that. Most of us are run in tracker funds that are globally diversified by weight of money. The weight of money is in these AI funds and if the genuine conclusion that these stocks are over-valued, we just have to grit our teeth and watch our pot’s value fall.
Gregg McClymont in an article in Professional Pensions makes the difference between Australia and the UK pots very clear (Gregg works for an Australian infrastructure provider operating for Nest and for Aussie supers).
McClymont with L&G default fund manager
He refers to UK DC saving as AE (auto enrolment – a British step short of Australian compulsion.
AE is both similar to the superannuation system – ‘soft’ UK compulsion versus ‘hard’ Australian compulsion – and quite different since Australian mass DC is delivered by pension funds organised on a sectoral basis. Perhaps the most striking example of difference in this respect is how the sector wide pension funds solved the problem of accessing private markets. They created IFM to do this in the midst of an opportunity to acquire from the Australian government core infrastructure which was in the process of privatisation. There was no ‘supply side’ question of the type which confronts UK DC funds.
The efficiency of scale is a more straightforward lesson from Australia (and from Canada with respect to public sector DB). Larger schemes can more easily drive down costs, improve investment governance, and unlock new allocation opportunities. The government’s push for consolidation, setting ambitious asset thresholds for DC schemes and pooling local government funds, reflects this logic.
But scale is a means, not an end. It demands robust governance, transparency, and a relentless focus on member outcomes, without which bigger funds risk becoming unwieldy or losing sight of their purpose. The Australian funds do offer lessons on how to get this right.
When writing her article in the FT, Mary McDougall talks to Australian Super,supremo – John Normand.
Reading what John and Gregg say makes me yearn for the day when whether through a default decumulation fund like Nest is developing or the radically different collective fund that will arrive with CDC, we have our funds managed with risks such as AI stocks, being better managed.
The International stock indices which most UK pension savings sit in are dominated by US equities, particularly Big Tech and AI, with the so-called Magnificent Seven US megacap tech stocks alone accounting for about one-quarter of the MSCI World index.
It is not just Australia which is taking action. McDougall tells us that a number of UK pension funds are cutting back their exposure to US equities, amid concerns over the market’s growing concentration in a small number of megacap tech stocks and the risk of a bubble.
Schemes have been shifting allocations to other geographic regions or adding protection against falling stock prices. There is evidence of the same investment trend in Canada
John Graham, chief executive of Canada’s largest pension fund CPPIB, told the FT this month that he was “worried about the concentration risk” in US equity markets and was “knowingly underweight” AI in the C$777.5bn (US$563bn) fund’s allocation to American assets.
The sad conclusion that we have to come to, when considering how little protection a default gives us is that most of us are in for a bumpy ride next year from these tech stocks. The sooner we have a new kind of DC/CDC default fund managing the money – the better.
