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Defined contribution focuses UK pensions

It's a sign of the times when the National Association of Pension Funds places significant focus on defined contribution (DC) pension schemes at its annual investment conference. But that was very much the situation at this year's three-day, Edinburgh gathering, entitled Investing Today, Securing Tomorrow.

The array of subjects discussed also indicates UK pension funds are fast evolving and pushing their investment management strategies and profiles towards LDI, 130/30, private equity, hedge funds, fiduciary management and pensions buyouts.

Comments by delegates indicate that pensions officials are no longer fearful of changes. Instead they are, in the main, willing to embrace solutions to proactively improve the professionalism and risk budgets of UK pension schemes.

One example is the amount of time spent discussing the importance of selecting the right investment funds for DC schemes and ensuring members receive the right information to understand how and what they should invest. Indeed, evidence this year on how this has helped pensions members came not from the UK but from Denmark and the US.

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Torben Mogen Pedersen, managing director of PensionDanmark, and Todd Ruppert, chief executive of T. Rowe Price Global Investment Services, both gave evidence suggesting the growth of DC schemes needs to be accompanied by relevant investment education. Mogen Pedersen also stressed that when "all the risk is covered by members, we are very focused on keeping the cost levels low" and that "the default options must be very carefully designed". Ruppert noted the total sum in DC in the US is $4.1trn (€2.63trn). Yet 34% of people covered by DC schemes in the US are not participating and 80% of the people who are would prefer to delegate the investment decisions.

This is a strand NAPF officials were quick to pick up on regarding the development of UK personal acc-ounts, scheduled for introduction in 2012. NAPF chief executive Joanne Segars questioned at what cost diversified investment strategies, such as ‘lifestyle' or ‘target retirement date' funds, are delivered in Denmark and US. Ruppert was quick to argue he does not believe good active investment returns could be delivered for 30 bps - as previously proposed by the initiator of UK personal accounts Lord Turner - and certainly not when good member communications are an important factor in pensions take-up. "If there is a premise to give individuals as much [income] as possible in retirement, starting with the premise of focusing on driving down costs is not the appropriate mechanism. You are not going to get talented active managers to participate. You'll get the cheap option but it doesn't work," said Ruppert.

His comments were met the following day with what was best described as restrained animosity from Paul Myners, chief executive of the Personal Accounts Delivery Authority. Giving what would otherwise have been a subdued update on the progress his body is making, Myners challenged Ruppert to prove active management would deliver alpha worthy of the additional costs it brings.

"If Mr Ruppert can prove that paying more money will lead to higher pensions it would be a very useful contribution to the debate. I am absolutely convinced that low costs are key. There is evidence where managers could deliver areas of super alpha. If you can find these managers, you should probably appoint them and pay up, but in the vast majority of places, low cost is critical. We will not deviate from that," said Myners.

Elsewhere at the conference, however, keeping costs to an absolute mininium was perhaps not the main priority for pensions officials.

The attendance at a session on fiduciary management might be symptomatic, delegates later suggested, of whether UK pension funds would be willing to adopt the concept. Anton van Nunen of Van Nunen & Partners and Philip Jan Looijen, director of fiduciary management of Mn Services, explained that fiduciary management has been implemented in the Netherlands to largely shift the responsibility for translating a fund's risk budget into investment needs, while still retaining the final control on selection decisions.

Yet session chairman Andrew Kirton, senior investment consultant at
Mercer, questioned why pension funds would consider fiduciary management if they could not totally hand over responsibility for those decisions - a comment Looijen quickly slammed by stating: "If [trustees] don't want the responsibility you should leave your board seat". Questions from the floor suggest the UK pensions industry could leapfrog fiduciary management and move straight to a transfer of total responsibility through pensions buyouts to satisfy scheme sponsors.

That said, all of the discussions, including positive contributions from Mike Taylor, chief executive of London Pensions Fund Authority, on climate change and its impact on pensions investment strategy, suggest the mood of UK pensions funds has shifted following continuous regulatory change. Whereas every minor adjustment affecting governance and fund liabilities might have been met in the past with scathing criticism and talk of widespread pension scheme closures, the mood at this year's Edinburgh conference implied pension professionals are better able to take it all in their stride and embrace new
thinking.

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