A television documentary series in the UK is currently transporting British viewers back to the 1970s, an era remembered for the oil crisis but also for government energy efficiency campaigns.
In the institutional investment world, it is remarkable how long it can take to weed out structural inefficiencies. The profound shock of the 2008 crisis has thrown some of these into sharp relief.
Two efficiency-promoting ideas are currently under discussion in the UK. One is to merge the pension fund investments of the London boroughs with the centralised Greater London funds for transportation and local government employees. It makes little intuitive sense to have over 30 separate London borough funds.
How have these inefficiencies arisen? The answer is, of course, a combination of precedent and a system in which each local authority is responsible for its own finances.
The current government’s ‘localism’ policy is encouraging bottom-up efficiency saving ideas in local government - for example, through pooled services. Pooling London’s funds fits intuitively within each idea but prescriptive legislation may be needed to aid the passage of this sensible plan.
The problem arises because of the separate responsibility that each London borough has for its fund and the separate finance fiefdoms with entrenched interests. Here, the pooled pension funds of multinational companies, such as Unilever or Shell, which have faced similar issues, should serve as an example.
Also problematic is the idea of a London infrastructure fund, which has been tacked on to the pooling concept, some say to make it more palatable to central government. This comes with its own problems and is an entirely separate issue from that of creating a single fund.
The second idea, promoted by the National Association of Pension Funds, is to reduce charges for defined contribution pensions. In the UK, much occupational defined contribution pension business has developed out of wholesale-retail pensions through life insurers and is notorious for high fees.
The effect of charges on the growth of invested capital can be easily modelled, unlike the likely investment outcome of a given strategy.
The NAPF recognises that its aims will, in part, be achieved through an institutionalisation of defined contribution pensions and the creation of Australian-style master trusts. Here, NEST, as a default fund for auto-enrollment and competitors like Now Pensions, will assist the process.
Both these initiatives deserve to succeed. Sometimes it takes a downturn to tackle
inefficiencies that are easy to overlook when times are good. And remembering those 1970s energy saving campaigns, we should not forget how quickly we reverted back to inefficiency when the good times came back.