As guardians of your pension savings, a pension fund aims to invest your cash with the fewest costs to get the best returns.
How they do this has mostly been in-house, but as competition for the best investments and access to new asset classes rises, funds have turned to outside help and investment advice by outsourcing investments.
The bind is that this service comes at a cost, and it is not clear yet if it's worth it.
There are two types of pension fund: defined benefit (DB) and defined contribution (DC).
DB pensions rely on how many years you worked for your employer, what you were paid, and some schemes' pay-outs are linked to your final salary, but are now almost all closed to new savers. They still control massive amounts of money and need good returns because of the relatively generous terms for savers.
DC pensions replaced these, and pay out based on your contributions across your career and the performance of your investments.
Both fund types are very focused on the best returns possible to pay savers.
As most UK defined benefit pension schemes move inexorably to a legacy phase, funds think 'outsourcing' could play a pivotal role in giving access to the widest range of investments to manage the trillions invested on behalf of millions of savers and pensioners.
There are fears schemes are not always getting the best value when managers and trustees outsource, sometimes ignoring some of the downsides and risks.
It is also hard to figure out if the outsourced teams' investments are performing at a level that makes it worth it for the fund's savers.
There is sometimes a lack of transparency over new outsourced investment performance, and benchmarking it against other investments is difficult as the information provided to funds is complex and not strictly comparable.
Ideally, investment performance comparisons for all UK pension funds should be freely available at no cost to sponsors and consumers.
The retirement income of millions of pensioners and their whole financial future depends on total transparency from the industry. Yet too often abstruse annual reports and investment statements are opaque.
There are caps on what funds can charge savers for investing their money for them.
Reforms on charges such as the legal requirement of a charge cap of 0.75% on defined contribution default funds, along with competitive pressures from an increasingly crowded DC workplace pension market, has pushed down charges in DC workplace pensions.
This has had the perverse result of restricting investment into high-performing asset classes, such as alternative investment and private equity.
These assets often use performance-related charges and despite the pensioner being better off, such outperformance effectively excludes these investment vehicles from the typical DC fund.
But the largest DC pension fund of them of all, Nest, has just taken the first steps in this direction as a result of recent regulatory easements.
Savers will now see if this will set a trend or whether liquidity issues with daily pricing be too much of a hurdle for DC funds to climb.
If you would like to read more about this, please read Stephanie Hawthorne’s full article: Outsourcing investment: hit or miss?
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