Now: Pensions has been beset by a host of administrative problem during the rollout of auto-enrolment, leading to it requesting to be removed from The Pensions Regulator’s authorised master trust list, and performance that has lagged all the other master trusts in the UK market over five years. In February the regulator’s Section 89 report said ‘NPL have demonstrated to us that almost all of the work needed to resolve the historic administrative issues has now been completed’. Its acquisition from Danish parent ATP by Cardano went through at the beginning of October, and since then it has been given master trust authorisation.
What do you plan to do to address the performance gap between Now: Pensions and pretty much all the other providers? Your 5-year annualised performance to 30.9.19 is 4.74 per cent, for growth phase investors, against an average across the sector of 9.69 per cent.
RF: The three and one year figures don’t show such a lag. We want to look forwards, and the three- and one-year performance shows we are not so far off. Over one year our performance is 10.22 per cent (the highest in the www.capa-data.com universe), and our three-year annualised performance is 6.55 per cent.
You have to ask what is the right benchmark or comparison. Should a diversified growth fund (DGF) be compared to a more traditional equity/bond allocation. These are two different strategies that justify different benchmarks. If you look at our diversified growth fund and how it has performed against a peer group of diversified growth funds that we monitor, we have done pretty well. We are number one over most periods.
But if you are a member of the default fund it’s not the benchmark that matters, it is what is delivered to your money.
PL: Over the next 10 years, think about what can happen to equity markets. We are of the belief that we want long term steady accumulation of funds, particularly for an investment community that is relatively new to investments. So we think a DGF is the right strategy.
Because you are fearful of optouts?
PL: No because this is their first experience of investing. We want them to have a steady experience.
But if the statistics show that generally speaking over a 30 year period equities will perform better, isn’t it the responsibility of the master trust to nudge people towards something it thinks is going to lead them to better outcomes?
RF: Is that a given going forward? Can you confidently predict western markets are not going to mirror Japan? Nobody has a crystal ball. And the trustees have been quite clear as to what the objective is and they have delivered on that objective consistently.
PL: The other reason why our performance has been different is because of the currency hedges. Other providers have not hedged their currency. If you talk about the long-term objectives of savers, their future obligations are in British pounds sterling so why are we not hedging currency? Would you feel comfortable if you had a long-term liability and it was unhedged?
Cardano Risk Management was appointed by the trustees as investment manager of the DGF back in June. Is there going to be any change in approach?
PL: The nature of the DGF is largely unchanged despite the change of investment manager, as philosophically Cardano’s approach to generating returns is not that different to that of ATP.
RF: The Cardano porfolios adopt a similar risk-based approach, that is resilient through different market environments, rather than being heavily weighted to a particular risk. It is a trustee decision. Let’s not lose sight of who is in charge of the trust.
The Now: Pensions default is very different to others on the market – a roughly 200 per cent-geared derivative-based risk parity fund, we understand. Is this suitable for long-term pension growth investors?
RF: Implementation varies on the environment. It is a different objective and it is what the trustees thought was a suitable objective.
The trustees set a particular objective and that has been clear to all employers and members. And at first ATP and now Cardano have delivered on that objective and then some. Has the buyer been short-changed? I don’t think so.
If we find we are not delivering on the cash plus 300 that has been set out as the expectation that members and employers should get, then things will be different.
But having performed at that level through the positive returns, when the negative markets do come, how will you maintain the return, if you haven’t banked the big gains during the good times?
RF: There is never a guarantee, but even when markets are falling it is possible we can get positive returns. Because the fund hasn’t painted itself into a particular corner of saying it is going to be 100 per cent equities. This is where the skill of the fund manager is called into play. None of us want tough times, but if tough times come around, when you have flexibility to adapt your exposure you could be going short.
This investment approach has been set by the trustees – do they have a different philosophy to the vast majority of other trustees out there?
RF: Each trustee board is unique and they come to their own decisions.
What was Cardano’s motivation for buying Now: Pensions?
RF: Cardano had been a DB-only player. This gives us exposure in DC which is a scale business. This was the largest of the scale businesses that was available for acquisition. ATP is focusing back on the Danish market so it became available. It made sense from our perspective. It gives us exposure to DC even if we are not managing the money.
If you look at the investment approach that ATP had to running the portfolio it is very much aligned with the way Cardano approaches investment. So it is a relatively seamless transition.
Part of the longer term strategic position is this gives us a DC vehicle to transfer clients we do DB work for into. Nobody has gone over yet but this is early days. The deal only closed at the beginning of October.
Do you think the regulatory and tax system has made life unnecessarily hard for providers?
RF: Small pots is a result of a policy decision. The net pay issue is also a result of a policy decision.
In terms of making the change to accommodate relief at source payments, are you aware of the complexities of that? It is not the flick of a switch. If it was, it would have been done. We are practically offering people money. It is there on the table.
Some have questioned whether it will be possible to restore all the contributions of those members whose contributions have not been collected because the data is no longer available. Will Now: Pensions be able to put all members back into the position they should have been in?
RF: We had the Section 89 from TPR back in February and we have had master trust authorisation. This is an organisation that is focused on doing things right for members. TPR has clear requirements for the collection and timely investment of contributions and we are focused on meeting those requirements.
So are there members whose fund have been eroded to zero by the charging structure?
RF: Yes. The charging structure is £1.50 per member per month plus 30 basis points on the asset management. But nobody is locked in. When people leave they are reminded of their ability to transfer. And the same thing happens when they get their benefit statements. These pots, whether active or deferred, cost money to administer – you have to pay the pensions levy on pots as well, which is 90p per member. You have to have a sustainable business to keep people’s retirement savings safe. This is a long term focus and in terms of good value, over the longer term, you have been through the discussions earlier in the summer and seen the PPI research. Now is actually an attractive place to consolidate if you want the DGF strategy.