Time for pension managers to get real

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I note the absurd comments made yesterday by  Lindsay Tomlinson at the conference of the National Association of Pension Funds.

He told the organisation, of which he is Chair, that funds are driven to make short-term decisions by modern society's demand for instant gratification, as symbolised by the fleeting and trivial nature of the "tweets" that come and go on the social messaging site.

This is absolute nonsense. Most people in occupational pension schemes have no choice at all on who their fund manager is. And most people who buy personal pensions never move their funds between companies — partly because the charges for doing so are so prohibitive (a move designed to undermine all competitive pressure) that it almost never pays to do so. In other words, short term pressure on pension fund managers is almost non-existent from those who really constitute their market.

In that case this is the one market where a long term view could be taken because it is already taken by those who really do provide the cash pension fund managers use.

The pressure Tomlinson refers to does not come from the customer in that case. Who does it come from then? From fund managers themselves, I suggest, who create a veneer of competition, not for the sake of the customer, but for their own sake, by suggesting relative performance (it has to be relative performance because most fund managers unsurprisingly after charges cannot come near top replicating the performance of the market as a whole) so that their pay is forced upwards. This is where the demand for churning (yes, I mean that — churning happens), trading for the short term and bonus driven market activity comes from. Let’s be under no illusion about that.

So, the real need is for radical reform. I have already suggested a basis for that in the Finance for the Future report ‘Making Pensions Work’.

But there is more to say — not least that a truly market driven pension industry, with consumer led behaviour, would demand reduced fund manager activity, an increased degree of index tracking (which costs very little to manage), a massively reduced cost structure, restrictions on short term trading activity, a demand for long term position holding and a true investment, rather than the current savings approach I explain in ‘Making Pensions Work’.

Pension reform is not about restricting competition in the pension market. It is about restricting the veneer of competition that now exists where the sole beneficiary is the pension industry and its fund managers who exploit potential and actual pensioners for their own short term gains. The need to eliminate this abuse is why pension reform is essential. The simple reality is that existing pension structures are abusive. And the time has come to stop that abuse.