Remember last September’s pensions debacle in the UK? The one where, according to the UK Pensions Regulator, turbulence in UK sovereign debt markets “exposed shortcomings in the resilience of liability-driven investment [LDI] funds, as well as in the operational processes of the funds and of pension schemes investing in them”? Well, there might be more than just financial and reputational risks on the horizon. The Financial Times recently published a report quoting a survey of City of London litigation trends by the London Solicitors Litigation Association, which warned that pension funds are likely to pursue asset managers and advisers who advocated such strategies in order to try to recover some of their losses.
One commentator for asset managers in litigation raised a suggested defence: pinning the blame on the pension fund trustees instead. The argument is that the trustees should have known and understood what the risks were when investing in these vehicles.
That raises the whole question of the fitness for purpose of the UK pension system. And it’s a question worth asking. The UK was in tenth spot in the latest annual Mercer CFA Institute Global Pension Index, behind Singapore and Australia. The UK pensions system is highly fragmented, with a great many smaller funds. PricewaterhouseCoopers estimates that as of October, the number of defined-benefit corporate pension schemes alone in the UK was over 5,000, to say nothing of other types of central and local government and other pension schemes.
How likely is it that they will have the knowledge and internal resources to face off against asset managers on equal terms? How deep is their grasp of asset management disciplines, complex financial products, and risk/returns calculations likely to be?
We may have had an answer with the LDI fiasco. The UK pensions sector desperately needs consolidation and upscaling, in both the intellectual and financial sense. A joint Amundi/Create-Research report in December warned that 75% of them are entering 2023 with negative returns – more money going out than in – yet with even fewer options for driving returns now that LDIs are under review. And what could be more damning in terms of the well-worn dumb money accusations about pension funds than what we’ve all witnessed?
