GLOBAL - Pension funds trustees are likely to want to opt for active management of defined contribution pension schemes in the coming years. Yet they fear applying such a strategy could be a battle, new research on the concept claims.
A study of 50 of the UK's largest pension schemes, to be published by Clear Path Analytics in April, found 73% of executives believe active management strategies will play a "significant" or "vital" role in their pension schemes by the time the UK NEST scheme is launched in 2012.
That said, at least 41% of respondents also said they felt "active management would face significant hurdles in gaining the full support of pension trustees" according to CPA, as the knowledge of members may be too low to make active management work to their advantage.
Solutions recommended by CPA included extra trustee governance, combined investment manager-trustee guidance groups or the wider use of sub-committees focused purely on DC issues.
Yet any decision to apply active management could be a tricky one, as some commentators suggest active management can be beneficial to pension scheme returns, but whether it actually is at present remains to be seen.
Paul Myners, City Minister for the UK government, voiced his concerns about active management against today at the NAPF seminar on corporate governance, as he said: "I think active management can add value but I don't think it can add value in the way it is being pursued at the moment: which is to take modest steps away from the benchmark to try to lock in the little bit of outperformance and then go back to something closer to the benchmark on the basis of the quarterly review over 90-day periods."
He argued while trustees say they look at longer-term performance, "nevertheless there is a focus on the last quarter's performance and the fund managers respond to signals they get from questioning. Portfolios that are less diversified, but in which the manager has higher conviction and backs that up where necessary with active strategy of engagement, are more likely over the longer-term to deliver superior returns".
He refused to favour one over the other, adding: "Both have a role, but I think there's a challenge for trustees to ask whether the current approach - which is to focus on short-term performance - will necessarily produce superior long term returns."
Russell Investments has issued a report, entitled When should investors consider an alternatives to passive investing, suggesting there are five ways to assess whether alternatives to passive management might be better suited to pension fund management.
The reasons for choosing passive investment alternatives are:
Russell Investments recognised the cost benefit and access to investments have to be taken into account, but said the efficacy of an existing index and how well it meets the pension fund's objectives has to be the overriding concern when deciding the active vs passive debate.