CORPIAS NEWSLETTER
Pensions News Bulletin June 2014
A round up of the pension changes in motion right now
No-one can say nothing changes in pensions but you could say change is the only constant. Below is a list of the changes, definite or awaiting assent, which make the present time a veritable pensions revolution.
Auto Enrolment is continuing to have a major impact on employers. But in your spare time you can plan for these!
New Evidence that Active Fund Management is not value for money
The Pension Institute at The Cass Business School released a paper showing that active fund management does not repay its higher fees and the small percent of managers generating returns above their costs don’t pass it on to investors.
The Pension Institute studied monthly returns of 516 UK equity funds between 1998 and 2008 and declared in their research report that almost all active fund managers fail to outperform the market once fees are extracted from returns.
The research found an annual alpha* return after fees of minus 1.44%, meaning a typical investor would be better off switching to a low-cost equity tracker.
Only 1% of fund managers were able to generate returns above operating and trading costs, but these managers “extract all of this for themselves via fees, leaving nothing for investors.” The remaining 99% of fund managers were unable to deliver outperformance from stock selection or market timing.
(*alpha return is the investment performance attributable to the managers skill rather than merely general market rises –which is called beta).
The highly technical research paper can be found here:
New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods
Comment
Most of us have heard the debate about whether active investment management or passive investment management is better. Or more to the point whether the extra fees you pay for the skill of active fund managers gives the investor value.
There is the old saying that a monkey sticking a pin in a list of potential investments is as likely to pick a winner as a fund manager. Also the saying that no-one beats the market forever seems to make sense because conditions change and investment managers are neither prescient nor able to move their funds around with total flexibility. Significant moves are also expensive which reduces performance.
These pro passive management ideas certainly seem to have some truth and the massive growth of passive funds suggests many investors believe or partly believe it. However most of us who use active investment management (alongside passive management) will point out that we are not picking managers or funds from the totality of the possible. We will focus on the small number of managers and funds that have a record of performance in their speciality and we know that any above market success will be for a limited time. However it’s important to understand the net performance after fees and not be impressed by the gross performance shown on the charts.
Just expressing it this way shows me that for the majority of defined contribution investors passive fund investing is more sensible because most members are not going to be making the decisions and taking the actions necessary to control their active management risks. However in an occupational scheme with interested and dynamic trustees they could choose to use active funds better than individual investors could.
Auto Enrolment. How do you measure up?
The first report on Auto enrolment compliance was recently published by the Pensions Regulator. It named Dunelm as failing to comply with legislation and required them to pay £108,000 missed pensions contributions but the reasons that led to the problems are pretty common ones as you will see from the list.
The pension regulator stated that Dunelm were now compliant and that they were open and helpful with regard to getting the matter put right.
Comment
Any of these reasons could derail auto-enrolment on its own let alone together. Many other companies will also experience these issues but maybe haven’t noticed its caused them problems. How are you auditing the post auto enrolment process? Is it rigorous enough?
The key points for employers committed to getting this right at first, and continuing to get it right every payroll period are:
Pension Scheme Accounts to change
As a result of the issue of the new UK accounting standard FRS 102 Pension scheme accounts are set to change. The current statement of recommended practice (SORP) dates back to 2007. There is a new draft SORP out for comment at the moment.
The Pensions Research Accountants Group (‘PRAG’) published an exposure draft which sets out a revised SORP: Financial Reports of Pension Schemes intended to replace the current 2007 version.
Interested parties are urged to take the opportunity to consider and comment on this draft by the deadline of 16 July 2014.
New pension account practices are necessary due to the Financial Reporting Council’s 2012 and 2013 revisions to UK financial reporting standards. These fundamentally reformed financial reporting and specifically addressed financial reporting by pension schemes. In addition, since the 2007 SORP was published pension investment arrangements have become increasingly complex, auto enrolment has been introduced and increasing numbers of pension schemes have been entering the Pension Protection Fund. The final paper may not be available on the internet but the exposure draft can be found here:
Statement of Recommended Practice: Financial Reports of Pension Schemes
Thank you for reading.