Report: UK Pensions Miss Out on Returns

Terry Flanagan

UK pension schemes are losing out on £1.7 billion in potential returns each year by accepting passive-style performance from actively managed funds according Aon Hewitt, the retirement, talent and health solutions business.

The UK pension industry managed £2 trillion of assets at the end of 2013. Aon Hewittt estimated that 42% of these assets, £840bn, were invested in equities of which £460bn was actively managed and the rest was in passive funds.

Aon Hewitt said in a statement: “Around 75% of the £460bn actively managed assets were, and still remain allocated to core active funds, which do little more than track their benchmark – resulting in UK pension schemes receiving sub-optimal returns on approximately £350bn of assets. If these assets could deliver an extra 0.5% a year either through better returns or lower fees that would be an extra £1.7bn in the real value of pension plan assets per year.”

Tim Giles, partner at Aon Hewitt, told Markets Media that pension trustees usually only have one day each year for investment issues which they spend on asset allocation.

Giles said: “Their active equity portfolios have become stale. They might have been right at some point in time but now produce little return.”

Aon Hewitt has been surveying pension trustees at its conferences this year and found that three quarters of respondents want either additional resources or to outsource the investment process.

“The focus for trustees is get busy or get out,” Giles added. “Respondents were split half and half between these options.”

He said the biggest recent trend in UK pensions has been the move to fiduciary mandates where trustees set the overall strategy, including the long term risk and return objectives but delegate day-to-day investment decisions to a fiduciary manager. The provider manages the assets against a bespoke liability benchmark.

“Unconstrained fiduciary mandates actually increase the exposure to active equity,” Giles said. “For our fiduciary clients Aon Hewitt has achieve equity returns of 2% above benchmarks net of all fees.”

He added that trustees also need to monitor passive equity mandates as alternative indexes or smart beta products can produce better long-term results rather than just tracking mainstream indexes.

The UK Government has put pension costs on the agenda by reviewing the £178bn Local Government Pension Scheme, one of the largest funded pension schemes in Europe.

This month the UK Department for Communities and Local Government issued a consultation paper on restructuring the Local Government Pension Scheme with the aim of making cost savings of £660m per year. The scheme is managed through 89 separate funds each with its own funding level, cash-flow and investment strategy.

In the paper pensions consultancy Hymans Robertson said the scheme could save £420m by moving to passive management – £230m from a reduction in investment fees and a £190m cut in transaction costs.

An active manager argues in the report that they have outperformed their performance benchmark by 3.2% since 2007 and 5.7% in the last three years.

The paper said: “However, Hymans Robertson cite evidence from defined benefit pensions funds in the United States which shows that for equities, returns are explained predominantly by market movements and asset allocation policy, with active management playing no role.”

Featured image via corund/ Dollar Photo Club

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