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Thinking big to solve a large-scale problem

Michael Johnson

The FCA’s recent Asset Management Market Study interim report provides a damning indictment of the fund management industry. It is long overdue. Article Michael Johnson.

The traditional themes of fees opacity, poor communication, the lack of standardisation, ineffective price competition between asset managers, and dismal performance are well aired, all immersed in a miasma of misaligned interests. The report is particularly critical of active fund management’s inability to deliver value for money, to both institutional and retail investors.

Presented as a consultation, the FCA has invited stakeholders to comment on a slew of remedies to address the identified issues. The industry should consider the FCA’s “provisional proposals” to be “shoves” rather than “nudges”. The mood music has changed: indeed, this hints at a cultural change within a regulator that is clearly running out of patience with an industry into which few people enter with the expressed purpose of enriching others.

One area of particular interest to the FCA is the potential for greater pooling of pension scheme assets. There is no ambiguity about the benefits this would produce for scheme members, notably the many opportunities to harness economies of scale. These include exercising leverage on investment price; affording better quality in-house expertise; lower third party procurement costs (including external advice); improved access to both co-investment opportunities and a wider range of asset classes, geographies and (fixed income) asset maturities; and lower administration costs per member.

Larger DC schemes could also exercise annuity buying power on behalf of retiring members, and harvest the “governance dividend” attributed to the larger schemes. High quality governance can add 0.5 percent to one percent to DB and DC scheme annual returns, respectively: the cumulative effect over a lifetime of saving could be pensions 25 percent larger than otherwise.

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