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John Greenwood: UK in relegation zone for investment performance

A recent Organisation for Economic Co-operation and Development report has highlighted an unwelcome accolade for the UK pension fund system – the bronze medal in the OECD worst investment performance competition.

Its latest Pensions Outlook report looks at pension saving throughout OECD countries and shows that between 2001 and 2010, pension funds in the UK delivered a real return of -0.1 per cent. Yes it was bad but the so-called lost decade is old news, you might say. But the OECD report also shows we have only managed an average real investment returns of pension funds of -1.1 per cent over the period 2007 to 2010.

These figures are across all types of pensions, both defined benefit and defined contribution. Only Spain and the US have performed worse in the list of 22 companies compared in the OECD survey.

At a time when we are revving up to enrol our entire working population into workplace pensions for the first time, this obviously does not look good.

But without being complacent, the reality is that our relegation zone position since the turn of the millennium is not necessarily down to bad investment management but instead the fact that markets went against us.

Chile, which tops the table with an annualised return through the Noughties in excess of 5 per cent, benefited from positive returns from its bonds, which performed well, as well as from the fact that much of its equity allocation was domestic.

As an emerging economy, it did well over the period. We did not. That is a fact of life and we have to get on with it.

How should UK pension funds approach asset allocation from here? How do we get proper approaches to asset allocation adopted by legacy schemes holding the pension assets of millions of Britons in unsuitable investment arrangements?

We have had a very bad 12 years now and there is a real chance that things will carry on like this for many years to come.

But there is also a chance that Europe will eventually be sorted out and our economy will get back onto a positive growth trajectory. The new pension default funds on the market, still with heavy weightings to equities in the growth phase of saving but with diversification into other asset classes, approach the risks and opportunities in the market in a balanced way.

But there are still many schemes out there, particularly among the closed-book aggregators but also with other life offices, that have 100 per cent equity allocations, in some cases right up to retirement date. And there will be cases where employees are automatically enrolled into these schemes.

The problem for contract based schemes is they cannot change the investment strategy without employee consent.

The Pensions Regulator does not have specific rules on how default funds should be constructed. The Investment Governance Group, which it chairs, does have “best practice” guidance but this goes little further than saying the default strategy should meet member needs in terms of risk and return. The guidelines say a scheme has to do this “as far as possible”, which highlights just how permissive this guidance is.

There is also the DWP guidance for DC default funds. This adopts a similar approach but again it is only guidance. It does hint that if the guidance is willfully ignored or does not achieve good outcomes, it “may” consider issuing statutory instruments to uphold members’ interests.

This will hardly strike fear into the hearts of closed-book aggregators that have bought books of pension business on the basis of running it off with as little effort as possible. Legacy business will become the business of those overseeing auto-enrolment. Hopefully, one positive outcome of the reforms is that legacy customers will be treated rather better.

John Greenwood is editor of Corporate Adviser


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