A number of possible developments relating to investment performance could
have an impact on the operation of stakeholder pensions and they do not
appear to be complementary. In fact, they are difficult to reconcile.
The first is the FSA's consultation paper 28, Comparative Information for
Financial Services, in which the FSA proposes that league tables showing
past investment perfor- mance should not be included in information
presented to consumers when they are considering taking out financial
products such as a pension plan.
However, other information under the heading of comparative information
should be given such as charges, product features, service standards and
financial strength. The FSA will announce its decisions on league tables in
the next couple of months.
Another FSA publication, occasional paper series 6, The Price of Retail
Investing in the UK, by Kevin James, goes further than the previous FSA
paper, arguing that, ultimately, price has a greater impact on returns than
Consumers choose products on past performance, not price. If managers
reach the top of the league tables on performance, they attract a large
amount of business but at that point they can milk existing customers with
high charges because consumers tend not to switch to different funds. He
concludes consumers would be better opting for low-charging funds such as
However, a properly designed past performance indicator can provide
information which will help consumers and IFAs to shop around more
effectively, make better informed decisions and encourage a more
It is true that consumers cannot use past performance data to predict
future performance but that is not to say investment performance is
completely random. Firms that attract and retain the best fund managers are
more likely to produce better investment returns than firms which do not.
In a competitive market, where past performance is widely publicised,
firms near the bottom of the pile are under the greatest pressure to
attract the best fund managers.
The fact that it is hard to predict which companies will have the best
relative fund performance is evidence that market competition drives up the
quality of investment management, with the worst performers having to
strive hardest to improve.
Undoubtedly, excessive emphasis on outstanding investment performance, or
on any other indicator, can lead to consumers making the wrong choices.
However, consumers will be unable to make decisions if comparative
information is withheld from them. Rather, they should be able to obtain
authoritative information on past performance which they can compare with
information which they see in advertisements, such as a list of comparable
funds from different companies showing relative perfor- mance over
five-year periods for the last 20 years.
Consumers looking at this information as a guide, say, to the worst and
best companies would soon realise the unreliability of raw past performance
data as an indicator of future performance.
IFAs, however, would be able to provide convincing qualitative analyses of
particular funds when making recommendations to clients. Their advice
covers far more than choosing a fund which is likely to produce the biggest
payout. It involves weighing up a client's needs and objectives and
assessing their attitude to risk.
More encouragingly, the Government has just published draft regulations
for stakeholder pensions covering its requirements from April 2002 on
investment. Schemes will be expected to report annually to each member on
the investment performance of their fund, relative to a common benchmark.
The proposed benchmark will be based on the investment growth recorded by
all stakeholder schemes in their default investment options.
In time, these benchmarks will inevitably affect the attitudes of scheme
members on whether to continue with their existing stakeholder provider or
to transfer their fund to a new provider. Past performance relative to the
benchmark will drive the behaviour of members, scheme trustees and
Past performance is a popular indicator among consumers. The regulators
should take the opportunity to present it in a useful and responsible way.
This is the difference between educating consumers and dictating to them.