Success (and failure) factors
Most of the success or failure of a pension system can be attributed to design and input factors – how much employer and employee contribute, whether there is compulsion, or soft compulsion, the role of fiscal incentives and mandatory guarantees or DC defaults.
Fund-specific factors, such as risk tolerance, asset allocation and governance arrangements will make up much of the difference in terms of long-term investment success.
Understanding the changing nature of the pensions and asset management business will be crucial for asset managers. Demographics and the rise of DC is likely to change the asset management sector profoundly and will make it much more of a social business.
Tomorrow’s end-user will be older and wiser, more sceptical and aware. Managers may have to accept an increasing social role in providing long-term retirement income solutions to those who may be as much concerned about long-term care as about pension income.
But in a world of QE and negative interest rates, the search for yield is critical for all pension funds and their members. In a recent report from the consultancy Kommalpha, a German insurance CIO was quoted as follows: “I used to be a portfolio manager and now I am a project manager.” Indeed, the top tier of leading pension funds is setting up dedicated teams to assess and target a new breed of direct opportunities across the credit spectrum – everything from real estate lending to leveraged loans. And some are building in-house teams to focus on these areas. Traditional, benchmark-orientated asset management is being disintermediated as investors seek illiquidity on the one hand and cheap beta, smart beta or systematic strategies on the other.
Over 50 European asset managers offer some kind of investment solution service for institutional investors, according to IPE research, suggesting that this is not just a marketing slogan. But if a key to future pension success lies in access to illiquid assets, can smaller funds access these opportunities?
What will be the role of emerging platforms, such as the UK Pension Infrastructure Platform or the Dutch National Investment Institute? Fiduciary management is a partial solution but pension fund users need to have adequate countervailing power in-house to secure their long-term interests.
To put it succinctly, as organisations, asset managers need to be good advisers as well as good investors, and to think like their clients. For their part, pension systems should promote economies of scale and consolidation where possible. And pension funds should structure themselves as effective fiduciaries and informed clients of the asset management and other services they buy in.