Following the EU Pension Fund Directive, much of the pensions focus of last month’s Seventh Annual World Cup of Investment Management in Barcelona was on trustees and the structure of the pensions industry.
At the conference Alan Pickering, chairman of the European Federation for Retirement Provision, said that the EU directive could either be a springboard or a straitjacket: “Because the directive has been introduced in turbulent financial times there is a real danger that its authors or interpreters will be intrusively prescriptive,” he said. “As parliaments come to terms with the domestic implications of the directive care should be taken not to produce even more regulation. A minimalist approach should be the order of the day.”
He also commented on the role of a public private partnership in pension provision. “The state should provide a pension 40% of take-home pay,” he said. “This will guarantee that all will live above the breadline in retirement. People cannot plan or cope in the absence of defined benefit pension provision.”
He added: “If the state transfers the obligation to provide guarantees to second pillar private sector schemes, these schemes will not perform optimally. However, if there is a basic minimum level of state provision then private sector schemes will be able to play to their strengths. Absolute security is absolutely unaffordable.”
Malcolm Gray, finance director of the Railway Pension Trustee Company, highlighted a major problem in the UK pensions industry. He argued that there are far too many small corporate pension schemes and that there should be schemes for sector or professional groups. “The small schemes can’t do a professional job because value is destroyed by the high unit cost,” he said. “The industry is being driven towards smaller portfolios and higher fees.
“For example, local government in the UK has 50 pension schemes when three or four would do,” he told IPE. “The government won’t do anything about it because there are too many vested interests: civil servants, whose jobs depend on it.”
Nick Watts, head of European investment practice at Watson Wyatt referred to the strained relations between trustees and their fund managers and consultants following losses incurred by pension funds. He stressed the need for “better governance, partnership and greater sense of accountability.” He added: “We are going to have to spend much more on pensions to get it right.”
Edwin Meysmans, vice president of the Belgian Pension Fund Association suggested that there was a growing tendency among pension funds to follow the latest pension funds and change their investment policies for the sake of it. He also argued against contribution holidays given recent losses suffered by pension funds.
Funding problems were also discussed. “In the present environment the main challenge for pension funds is that long term goals in terms of return may be restricted by short term funding goals,” Massoud Mussavian, executive director of the equities division at Goldman Sachs, said in an interview.
The growing importance of SRI and the role it can play in the strategies adopted by pension funds was addressed by Matthew Kiernan, chief executive of Innovest Strategic Advisors. He said that “socially responsible investing should be an overlay on all investment and not treated as a separate whacky new asset class.”
The importance of country classification was addressed by Graham Colbourne, director at FTSE. He said that when looking at new markets, investors should consider materiality, the degree of economic advancement and the quality of that market. He cited an example of a promising candidate: “While South Africa doesn’t perform very well in terms of economic activity, it is a good quality market that functions well and that may present opportunities to investors,” he said.
David Hager, associate at Hewitt, lamented the dumbing down of investing. “The flair is being driven out of the investment management process these days,” he said. “Very little thought is going in to how much of benchmark generation is real skill and how much just random number generation.”
Meanwhile Jean-Louis Nakamura, finance director of the Fonds de Réserve pour les Retraites, the E16bn French pension reserve fund, made some critical comments about the standard of some asset managers’ applications for mandates.
“Some asset managers did not understand that we are driving our call for tenders under the French rules which are stricter than those set out in the EU directive,” he said. “For example, there is no question of negotiating the mandates; some managers have some difficulty in understanding this point.”
He added: “It is very important that applicants answer exactly the questions asked. Some of the asset managers have taken a very ‘industrial’ approach in that they gave standard answers to questions that are not the standard questions found in this kind of process.”
The proposals will be assessed according to three criteria. The first is the quality of the management process and how compatible it is with the fund’s financial process. The second is the quality of the operational and risk control. The third criterion is price. “Some applications diverge on the first two criteria,” said Nakamura.
Nakamura said the winners would be announced by mid-May, later than the expected date of the end of the first quarter of 2004.