A pensions giant has asked awkward questions of Scotland’s much-vaunted fund management industry as the Government proposes to make changes to the regulatory regime that could impact millions who are unaware of them.
The Government proposes to lift the cap on the charges that fund managers can impose in respect of much of the money held in defined contribution schemes from 0.75 per cent annually.
It says this will allow schemes to invest in a wider range of assets, including those managed by private equity funds that it is claimed can support the development of the innovative firms the UK needs.
The proposal has left many feeling uneasy, however.
The default defined contribution schemes concerned hold the savings of millions of people, including many on relatively low incomes who have been automatically enrolled in company plans.
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Unlike defined benefit schemes that provide guaranteed amounts based on the salaries of members concerned, how much defined contribution arrangements pay out depends entirely on what happens to the value of the funds they invest in.
Take just an additional 0.25 per cent out of the pot every year and the compounding principle means the value of the retirement fund could end up thousands of pounds lower.
In a submission to the Department for Work and Pensions, Scottish Widows says the cap should not be lifted in respect of the default schemes that employees are enrolled in if they don’t select another one.
Maria Nazarova-Doyle, head of pension investments at the Edinburgh-based giant, said: “We see no evidence to suggest that performance fees improve customer outcomes and we do not see a need for them to be permitted in default workplace pension funds.”
She added: “Our research shows that few pension savers understand charges or their effect on funds, with half admitting to struggling with comparatively simple concepts such as percentages.”
The submission may make uncomfortable reading for the active managers that are the mainstay of the sector in Scotland. It could leave pension fund trustees wondering why they should choose more expensive stock-pickers to manage their assets rather than put them in low cost tracker funds that simply aim to follow a given index.
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Lloyds Banking Group owned-Scottish Widows uses external managers to run its £170 billion funds.
Its submission to the DWP comes at a key time for the sector in Scotland. Consolidation has left much of the activity in the country under the control of a business that is facing challenges, in the form of Standard Life Aberdeen.
This was created in 2017 following the £11bn merger between pensions giant Standard Life and Aberdeen Asset Management, both of which had hoovered up investment businesses in preceding years.
Standard Life Aberdeen decided to focus on investment management and sold its pensions business to Phoenix for £3.2bn in 2018.
However the company hasn’t had a very happy time of it in the investment business since the merger completed. The group suffered net outflows of more than £100bn in the four years from 2017 to 2020, although the pace slowed markedly last year.
It is losing the mandate to run £70bn funds in all as a result of a spat with Lloyds Banking Group, which had relied on Aberdeen to manage the funds of Scottish Widows. Lloyds sold the Scottish Widows Investment Partnership inhouse funds arm to Aberdeen Asset Management in a £560m deal in 2014.
The bank was very unhappy about the Standard Life-Aberdeen merger. It is now working with Schroders.
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The new chief executive of Standard Life Aberdeen, Stephen Bird, has decided to rebrand the business Abrdn – pronounced Aberdeen, to help it get back on the growth track. But he knows the company must show that performance issues are sorted.
He said in March that the group enjoyed improved investment performance in 2020 with returns achieved on 66% of assets under management above benchmark over three years, against 60% in 2019.
Mr Bird may look enviously at Edinburgh-based Baillie Gifford, which has made a compelling case for active managers by achieving strong performances as manager of trusts such as Scottish Mortgage. The partnership has been rewarded for being quick to spot the potential of companies such as Tesla.
Martin Gilbert, who served as joint chief executive of SLA after leading Aberdeen Asset Management into the 2017 merger, has just underlined his belief in the value of active managers.
He chairs the AssetCo business which last month agreed to buy Edinburgh-based Saracen Fund Managers for £2.75 million in the belief it can grow demand for the firm’s services.
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That deal reflects the continuing trend for consolidation in the industry which could see the ranks of Scottish players thinned further as firms seek the scale economies some think are essential to compete in fast-changing markets. Developments in IT and the regulatory sphere are imposing additional costs on firms.
Only last week Leicester-based asset manager Mattioli Woods agreed to buy Scottish private equity firm Maven for up to £100m. What became Maven was bought out of Aberdeen Asset Management in 2009.
One imagines Mattioli expects demand for private equity products to grow , and to make good money in the sector.
Scottish Widows seems to feel that if default schemes are to be allowed to invest in products like private equity the managers concerned should charge lower fees than are the norm. Private equity firms usually expect to get rewards related to the gains made on their investments plus an annual management fee.
As millions more people are enrolled in defined contribution pension schemes, the onus will surely be on all managers of defined contribution schemes to prove they can deliver good returns while keeping fees down.
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