Improving the institutional investment chain

17 Oct 2017

Caroline Escott, Pensions and Lifetime Savings Association

The UK investment management industry is the second largest in the world and manages approximately £1.9bn of assets on behalf of UK pension funds and their members. Given the sums involved, it is in the interests of the millions of people saving for their retirement that the asset management sector is competitive and offers good value.

Pension schemes are concerned about the potential misalignment of interests in the sector, an issue exacerbated by the lack of transparency on costs and charges. There was therefore widespread support for the FCA’s decision to conduct a market study of the asset management sector.

The FCA’s final report, published in June, provided little closure but did recommend a wide-ranging package of remedies to give protection to investors who are less able to obtain value for money; drive competitive pressure on asset managers; and improve the effectiveness of intermediaries including investment consultants and platforms. Perhaps the two most interesting proposals are those regarding investment consultants and scheme consolidation.

Alongside its final report, the FCA issued its provisional view, now confirmed, to refer the investment consultant sector to the Competition and Markets Authority (CMA) for investigation and reject the Undertakings in Lieu (UIL) presented by the three largest consultancies. Although the UIL contained many welcome measures this decision was one we supported because in our members’ view the referral to the CMA will lead to broader structural review and a chance to deliver the reform that we believe the sector needs.

On scheme consolidation, the FCA proposed that: “DWP continues to explore the possibility of Removing some of the barriers to pension scheme consolidation and pooling.”

The report argued that there was some evidence that smaller schemes are less likely to be able to exert pressure on fund managers, leading to poorer outcomes. This echoed the findings of the PLSA’s own defined benefit taskforce, which in its second report in March, and final report, published in late September, set out some of the possible cost savings and other benefits of scale for schemes from merging governance, administration, assets or a combination of the three.

This demand-side aspect is fundamental to improving the way in which the UK institutional investment chain works and only compliment other remedies such as better transparency and disclosure of fees. The FCA’s final report did not provide many definite answers, with several essential questions about the nature and structure of the UK institutional and retail investment markets still open for discussion.

Pension schemes have played a vital role in the work of the FCA so far, and it is important they continue to do so to ensure that the market works in the best interests of schemes and members who depend on their workplace pensions for a stable and security retirement.

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