NORDIC/EUROPE - Asset managers working for pension funds do not “add value” to propositions around 80% of the time, according to Watson Wyatt.
Roger Urwin, global head of consulting at the firm, told delegates at the Pension Fund Investment World Nordic 2008 conference in Stockholm recent research conducted by the consulting firm had highlighted the “product proliferation” in the industry.
Urwin said the Defining Moments research - scheduled for publication in June - showed there is “so much choice, if not too much choice, that providers and pension funds are having to run as fast as possible just to keep up rather than making any progress”.
As a result, he warned there is “a central feature if the over-marketing - particularly of alpha - and the under-delivery of our investment institutions”, as he claimed “it’s very much an 80:20 industry, where 80% of the time managers can’t add value to the proposition”.
He also argued “80% of the time pension funds can’t add value either” largely because they don’t have the necessary skills, given many of the trustees boards Watson Wyatt works with are “not populated with investment experts and investment knowledge is not that high, which presents an issue”.
Urwin suggested pension funds “would do better” with governance structures which are external to the trustee board but internal to the institution - such as the adoption of a chief investment officer-type model.
That said, he admitted one issue to be addressed under this model is how pension funds identify that role and who to delegate the responsibility to, so it is this which is “leading to the development of fiduciary management services” found to be popular in the Netherlands, but which also has “outbreaks in Germany and the UK”.
Urwin also claimed in his presentation defined contribution (DC) schemes would overtake defined benefit (DB) schemes by the middle of 2014 across Europe, although he warned DC plans do not currently offer members a “good deal”.
“[Members] are not really getting what they want or what they need. It’s not an indictment, it’s merely that DC has not evolved as much as it might have,” added Urwin.
He warned DC needs to benefit from technological developments to allow schemes to “capture life circumstances” of its members, and suggested DC plans “should have some form of facebook revolution ahead to make sure they [members] get the right sort of risk for their needs”.
But while Urwin claimed DC will become more common as it is a “corporate reaction to managing costs”, he admitted it is “unclear in the future” how much dominance will be given to workplace pensions (WPPs), and more specifically whether they will become “cafeteria-style pensions”, where the individual gets a pot of money to do with as they wish.
At the same time, Urwin predicted the next few years will see “four funerals” in the industry as the current governance model of “under-competent and over-involved boards” will come to an end, as will the current DC model of “one-size fits all”.
In addition, Watson Wyatt suggested the current “cost spirals” will collapse, while the relative return investment model - where alpha is captive to beta - will finish and be replaced by a new relationship of “alpha and beta as a complementary pair”.
Watson Wyatt has proposed pension funds should cut their asset management costs to help pay for improvements to their internal resources. (See earlier IPE story: Watson Wyatt calls on pension funds to review focus)
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com
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