Today, the pension market is largely homogenous with third party fund links being the norm. Skandia offers 396, Legal & General offers 389, Axa offers 172 funds, Zurich, 135 funds and AIG 109 funds.
“The landscape of pension provision has changed in many ways over the past few years. Not only has there been the overarching trend away from occupational schemes, but a greater awareness of what constitutes acceptable performance from investments has led pension providers to re-examine the choice offered to policyholders,” says John Porteous, director, BDO Stoy Hayward Investment Management. “What’s more, competitive pressures have driven charges downwards – with a knock on effect for adviser remuneration.
Bob Perkins, technical manager at Origen reckons the demise of with-profits has been a catalyst. “In the past there was perhaps a tendency to look for good managed funds or indeed, with profit funds, rather than a wide range of specialist funds. That approach has changed with the demise of with profits and as more advisers try to add value by encouraging a “portfolio” strategy,” he says.
Insurers have tackled the challenge in different ways. Some have offered a broad range of investment choices – effectively providing a quasi fund supermarket. Others have attempted to offer a narrower choice based upon a screening process carried out by in house or external investment panels.
Damian Stancombe, head of employee benefits at Punter Southall says: “Over the last 18 months our DC provider selection process, driven by the corporate client has continually focused on investment range and performance, above all factors besides financial strength.”
Having a range of funds from specialist manager seems the perfect scenario. The big questions are, who are the best managers and where can you can get a piece the action.
Each year Citywire, the fund analyst examines the three-year investment records of more than 550 fund managers to identify the 100 who, based on past performance, are most capable of delivering added value.
For each fund manager with a three-year record, Citywire has calculated a “manager ratio”. This, based on analysis of returns to the end of last year, measures the added value of a fund manager’s stock-picking, bearing in mind the risks they take with the money under their control. In simple terms, the higher the ratio, the better the fund manager.
If a manager runs two investment funds, the ratio is based on analysis of both. Top five boasting scores of more than two and top of the pile is Daniel Nickols, 37-year-old manager of Old Mutual UK Select Smaller Companies, with a ratio of 2.34.
But the Citywire Funds Insider Wrap 100 2007 reveals the stars that can be accessed within this restricted universe of managers available on life and pension platforms. Knowing where the talent is can help you decide which platforms to use.
In some ways the list looks similar to the Citywire Top 100 – Old Mutual Asset Managers small-cap specialist Daniel Nickols is still at the top but there are some notable exceptions including Georgina Brittan (JPMorgan), Leonard Klahr (Old Mutual) are not offered by pension providers. But all of the top 10 bar Michael Fox, who managers the top-rated ethical fund CIS Sustainable Leaders are represented on one or more pension’s platforms.
Needless to say some of the great and the good are on most providers platform – Neil Woodford, the Invesco Perpetual star man is available on most pension platforms except Norwich Union, Prudential and Royal Skandia, as are top Invesco bond duo Paul Causer and Paul Read. They appear to be among the most popularly used external funds.
But Stephen Snowden, on the of the UK’s leading bond managers is only available on 6 out of 14 platform – for the record they are AIG, Axa, Skandia, Standard Life, Winterthur and Zurich. George Luckraft, the top performing Axa Framlington equity income manager can only be accessed via 7 platforms (AIG, Axa, Canada Life, L&G, Skandia, Winterthur and Zurich).
Some providers don’t have any top rated managers. Norwich Union does not have a single AAA rated manager – last year it had just one: Mark Gull at Morley but he left fund management altogether earlier this year – and neither does the Prudential.
Jonathan Miller at Citywire, says: “The pension provider used by a company may leave employees with a small pot of good fund managers to choose from. People are unaware they might be faced with a poor choice. While the default option tends to be popular, it is often inappropriate for an employee’s risk profile.”
Despite the choice, default funds still win the day. Take Standard Life, for example. Its top selling external funds include, BGlobal Equity 50:50 Index fund, Aberdeen Balanced fund, Newton Managed fund, Invesco Perpetual High Income fund and Fidelity Global Special Situations fund.
Its top three sellers though are its own internally managed Pension Managed One fund, followed by Pension With-Profits fund and its Pension Millennium With Profits fund.
It is a similar tale across the road in Edinburgh at Scottish Widows – it offers some cracking fund managers but its best selling external fund is a BGI 50:50 tracker, while its own funds sell the most.
“We offer the likes of Invesco Perpetual High Income, New Star Property and Schroder Mid-250 but most go for the default funds which is why the BGI Global 50:50 (which invest half in UK equities and half overseas) is a big winner,” says John Taylor, marketing director corporate pensions at Widows. “Anecdotally half of GPPs business goes into defaults despite trying to engage with employees to take advantage of the funds on offer.”
Needless to say many funds on the platforms aren’t used at all and some providers simply tie up with external fund managers because of demand – not always because they are any good.
“The vast majority of pension provider’s investment selection panels have been made not from the investment point of view but from a marketing angle. It won’t include new funds,” says Mark Dampier at Hargreaves Lansdown. “Most pension providers don’t want to put on small boutique type funds, first because they are often capped at a later date which causes problems from an administration angle, nor are they popular with most IFAs. In fact brand, brand awareness and advertising are probably far more important.”
But perhaps the real issue is not about choice but about the quality of funds being offered. L&G offers more external links that any other provider yet has one of the lowest proportions of Citywire rated fund managers – 39 per cent. The highest proportion is offered by MetLife which has 60 per cent of its 45 funds offered on pension platforms rated A or above.
And while many advisers and consultants agree that more choice is an improvement, some question whether too much choice could cause problems of its own. A look at providers’ literature is mind blowing – dozens of fund links which is likely to leave the man in the street bewildered.
“Clearly, with greater choice comes greater potential to confuse policyholders and indeed the risk that funds will be selected purely on the grounds of past performance – as opposed to suitability and appropriateness,” says Porteous.
Perkins admits that a wide range of fund choices is generally desirable, but reckons it is probably not essential at the outset and that many advisers might consider that offering a narrower range might be more appropriate. “This may mean offering members a choice of, say, three managed portfolios at the outset, usually risk related but the members still have access to other funds if they want to consider them.”
Stancombe agrees that you can have too much of a good thing and cites recent American research – “Retirement Savings Portfolio Management” by Jeff Dominitz – suggesting the optimal fund range consists of just nine choices.
“Where external funds have been selected, these have mainly been the well known ones such as the Invesco Perpetual High Income fund, which perhaps demonstrates, despite the cost, that name awareness plays a major role in the decision-making process,” says Stancombe. “Overall, we believe that a tighter and more selective fund range would present a more suitable approach for most people who are scared by choice, however careful consideration and consultation should be undertaken to ensure a sponsoring employer is able to justify the resulting streamlined fund range.”
There is also the small matter of service – a massive bug bear for advisers. The key driver for many advisory firms has become the ability to transact efficiently, never mind which funds they offer.
“In this market environment, those providers that can minimise administrative inefficiency and deliver their proposition in a manner that is clear and reliable for both client and adviser is likely to be a winner over the longer term,” says Perkins. “As far as advisers are concerned fund ranges and performance are a part of the research but it is more likely that service and administration will be larger factors in the selection process.”
It is a change for the better than many of Britain’s best talent can now be accessed via a workplace pension. Turgid balanced managed funds of the past have failed to match the performance of many external funds. Admittedly many would not be suitable for some employees, while they exclude lifestyle funds, which many experts believe are the most suitable for employees as they are de-risked as they approach retirement.
Having a greater choice is only one piece of the jigsaw – the biggest challenge to employers and providers is education. Having the likes of Woodford, Snowden and Nickols on the fund list counts for nothing if the employee simply ticks the default box without a moment’s thought.