The Financial Conduct Authority (FCA) is to be congratulated on its recent interim Asset Management Market Study. Its robust, independent and damning evidence skewers any justification that active fund management of listed assets is worth the candle.
The consequences for the asset management industry are potentially devastating, but radical surgery is long overdue. Its failings have serious implications for the health of the country’s pension funds, reflected in Melbourne Mercer Global Pension Index. This shows the UK’s pensions landscape continuing to slide down the global ranking. In addition, the UK’s defined benefit schemes now have the weakest funding position in Europe. Britain has the highest proportion of company schemes (38%) flagged as being in the weakest 20% of their industry peer groups, and UK company schemes are also the most underfunded relative to revenues.
Simplification is the key. In respect of listed assets, over any meaningful timeframe, passive management should be embraced. The Government, acting through the Department of Communities and Local Government (DCLG) as sponsor of the Local Government Pension Scheme (LGPS), has a great opportunity to exhibit leadership, in the interests of all members of funded pension schemes. It should resuscitate and implemented its May 2014 proposals that:
- all of the LGPS’s externally actively managed listed assets (some £85 billion at the time) should be moved to passive fund management; and
- all “fund of funds”, which incur multiple layers of costs, should be replaced by one investment vehicle for alternative assets, to be managed in-house.
The Government is in no position to enforce similar proposals on private sector schemes but, in light of the FCA’s report, many would consider it irresponsible for them not to follow DCLG’s lead. The FCA should be encouraged to meet DCLG to discuss the implications of its findings.