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Venting their spleen

This month’s Off The Record asks whether Europe’s pension funds have got their priorities right. In particular, are they paying too much attention to investment management and not enough to scheme administration?
Over the past year, the stock and capital markets have dominated the thinking of pension funds, particularly those affected by underfunding. But is a recovery in equities the only way pension funds can reduce their losses? Must they always be captives to capricious equity markets?
So should pension funds switch their attention from improving the investment performance of their assets to tightening up scheme administration, outsourcing all non-core operations – including investment management – and dispensing with the services of investment consultants altogether?
We also wanted to know where pension fund managers see the biggest threat to pension funds – whether is unnecessary regulation, inappropriate accountancy standards or any other interference.
Our questions were designed to provoke, and provoke they certainly did. Many of the pension fund managers and administrators who responded to our questionnaire felt that the options we suggested were too extreme, too unrealistic, and too simplistic. And their response generally was a reasoned and reasonable endorsement of the role of asset managers and investment consultants within a pension fund
However, they clearly relished the opportunity to put the boot into what they saw as the real threat in terms of the costs they impose – governments and their finance and social security departments.
The central plank of our proposition – that scheme administration deserves to be taken as seriously as asset management, wins general and unsurprising support. A large majority of managers (71%) agree that the efficient administration of a pension plan is as important as the investment performance of its funds.
However, only one in four managers (24%) think that controlling pension scheme costs is more important than attempting to enhance investment returns. The suggestion that controlling costs is “more” important worries some, who suggest “just as”. However, a clear majority (62%) disagree.
For many it is simply a matter of scale. One pension fund manager comments: “On principle, it is important to be as efficient as possible but our administration costs pale into small decimal places beside the impact of investment performance.” Another manager points out that administration costs in his scheme represent only between 0.1% and 0.2% of the scheme’s assets.
The suggestion that, in a fully funded scheme, the timely and efficient payment of contributions achieves more than active asset management wins little support with only one in three (34%) agreeing. “Two weeks delay in contribution payments should be irrelevant,” one pension fund manager suggests. “Anything more is just gross incompetence or fraud.”
Some pension fund managers feel that our suggestion simply does not make sense in the context of their experience. The manager of a UK pension fund comments: “We are a mature fund, on a contribution holiday and have actively rebalanced our investments to avoid precisely the drop in value that so many funds have experienced. How then can it be true that prompt contributions matter more than active investment managing?”
One possible way for a pension fund to reduce its costs and patch up its pipe work is to strip out inessential activities. So we asked whether pension funds should outsource as many of their activities as possible. However, this wins little support, with only one in four (26%) managers agreeing. Again the objection is scale. “It will depend on how complex the plan is and how large the resources base is,” one manager remarks.
Taking a diametrically different approach, we proposed that pension funds should keep investment management in-house because it gives them more control. Only one in four (27%) managers agree with this proposition and two in three (66%) disagree. One manager explains: “Control without expertise is not preferable. External management should nonetheless be amenable to checks and selection and this gives the freedom to change without major reorganisation internally.”
The manager of a German pension points out that “it depends on the quality of the in-house resources”.
A Swiss pension fund manager observes: “Control is a factor but there are many more to strike the right balance between external and internal management.”
Again size is a determining factor. Respondents suggest that outsourcing can lower pension fund costs but only if the fund has assets of between E1bn to E1.5bn.
Would pension fund life be simpler, and cheaper, without investment consultants? The suggestion that investment consultants are an unnecessary expense and should be shown the door meets with some approval. Investment consultants are “parasitic – and a lot less intelligent than me” is the robust response of a local authority pension fund manager in the UK. However, three in four managers (74%) oppose the idea. Most favour the use of investment consultants, although one adds the caveat that “actuaries do not make the best consultants”.
How important is investment performance to the members of a pension scheme? We put the suggestion that, in spite of well-publicised stock market turbulence, members of occupational pension funds are not really interested in the day-to-day performance of their fund’s investments. A substantial majority of managers (80%) agree. One points out that members became interested only “when the media feed them some times misleading, usually short-termist stories”.
Some managers make the point that the level of members’ interest will depend largely on what type of scheme they are in – defined benefit (DB) or defined contribution (DC). One manager comments: “They may not be interested if they are in final salary schemes and the company can afford to underwrite any losses. However, they will be keenly interested if it is going to result in a smaller pension.” Another points out that “the member close to retirement is very directly affected if in a DC scheme”.
Setting aside the cost of investment management, we asked what pension funds saw as the main source of unnecessary costs. Regulation emerges as the chief culprit. A substantial majority (82%) agree that unnecessary regulation and supervision are a major source of cots for pension funds. There are some qualifications. The problem is inadequate regulation and supervision,” one manager points out.
Perhaps the greatest threat to pension funds, in terms of unwanted costs, comes from organisations that do not understand how pension funds work. This suggestion wins strong support, with agreement from a clear majority (71%).
We then asked managers who agreed with this suggestion to choose from three types of organisations – credit rating agencies, accounting standards bodies or regulatory authorities – the one that represented the greatest threat.
Credit rating agencies escape lightly. In spite of the uproar in Germany that followed Standard & Poor’s downgrade of ThyssenKrupp as a result of its pension fund liabilities, only small percentage (16%) feel credit agencies are a threat.
Accounting standards bodies come in for more criticism however, with slightly more than half (53%) of respondents classifying them as a threat to pension funds with their market value approach to pension fund assets. One manager comments wryly: “They say, don’t shoot the messenger. I say, but the messenger isn’t innocent or objective either.”
However regulators get the roughest ride, with a substantial majority of our respondents (78%) identifying them as the single biggest threat to pension funds.
There are plenty of other bêtes noires. Managers point the finger at, “incompetent, un-skilled and myopic trustees; sponsoring employers who do not understand how pension funds work; investment consultants who pander to short termism; and pension consultants with the only goal to grow their business”.
A favourite target is government. One pension fund manager complains: “The government is the biggest threat of all and they should understand – what excuse have they for not doing so?” What indeed.

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