Do not let costs become an obsession
Our report this month on management and outsourcing discusses how pension funds must increasingly rely on external organisations to analyse their portfolios, particularly from a cost perspective.
This is linked to a growing focus on costs and ‘value for money’ by pension providers and stakeholders, including politicians. Pension funds in some cases are implicitly required by regulators to ensure they are doing everything in their power to maximise value for money. Asset managers also have to meet strict regulatory requirements.
This is a welcome development. However, there are several issues the industry has to grapple with. Defining value for money in asset management is not simply a question of net risk-adjusted returns. Most definitions imply quality, effectiveness and sustainability. The CFA UK has come up with a sensible framework but it may take years before a common industry definition is agreed.
There is also a paradox involved in this development. The organisations providing data and cost analysis do not work for free. Stricter regulation also implies more detailed and frequent reporting by pension funds, which is costly in time and resources. The industry as a whole has to pay to achieve value-for-money objectives. It is hard to imagine how the costs will be borne by anyone other than pension fund members.
Pension funds can and should continue to grow as organisations, towards a goal of becoming ever more sophisticated investors that can provide security in retirement and real support to the economy. This will require the industry as a whole to grow, with third-party service providers offering innovative, useful services to end-clients. As such, the emergence of data and cost analysis providers is encouraging.
However, the risk of focusing excessively on costs and value for money is that pension funds will lose sight of their main goal of providing attractive and stable long-term returns. To achieve the latter, they will have to forgo cost considerations and focus instead on finding solutions to the biggest problems of the time –that is, the record low interest rates and expected returns.
Regulators should focus on systemic issues as well as increasing market competition. Pension funds should feel comfortable investing in higher-yielding private market strategies, which requires more intense scrutiny by regulators. Too much emphasis on costs risks becoming counterproductive.
Carlo Svaluto Moreolo, Senior Staff Writer