From the blog: “Investment consultants have contributed to the poor performance of UK employer-backed pension funds by offering the same advice at the same time,” asserted a recent article in the Financial Times. And I could not agree more.
With more than 70 per cent of defined benefit pension assets in the UK advised by the three largest consultancies, the UK pensions market is a true oligopoly.
For 10 years we have been clamouring about this topic. With more than 70 per cent of defined benefit pension assets in the UK advised by the three largest consultancies, the UK pensions industry is a true oligopoly.
A UK Law Commission report presented to parliament last year said: “We noted the investment consultancy market was highly concentrated, with three firms dominating the market.
"It was suggested that this led to many pension schemes being given very similar advice, creating ‘herding’ patterns of investment behaviour."
With many pension schemes targeting rather ambitious returns in their recovery plans, perhaps the only chance they have to achieve their goals is to get advice that is different from the rest of the herd
In fact, it is hard to think of many other sectors with as much industry concentration.
The unfortunate result is trustees paying too much and getting unoriginal advice, which leaves them following the herd.
I can understand the conundrum of the managers of the big three consultancies: how do you advise thousands of clients with hundreds of billions to invest in a way that gives them any sort of edge?
It is difficult to beat the markets when you are the markets.
Source: Gatemore
With many pension schemes targeting rather ambitious returns in their recovery plans, perhaps the only chance they have to achieve their goals is to get advice that is different from the rest of the herd.
So what is a trustee to do?
Embrace one of the most important principles of investing – that size is the enemy of performance. This is a well-accepted concept among seasoned investors.
In fact, Warren Buffett has remarked repeatedly about how he would never expect to generate the returns he did when Berkshire Hathaway was much smaller.
While some trustees recognise this principle applies to certain types of asset managers, very few appreciate that it is also relevant to investment consultants whose advice is the key driver of total performance.
How do you design a derisking plan? How do you approach asset allocation? Where are the opportunities to invest with a higher margin of safety? How do you manage risk?
When most of the market has similar answers to these questions the results are highly predictable – and largely disappointing.
It is time to think differently and break the oligopoly in pensions.
Mark Hodgson is managing director UK at Gatemore
