Kay Review: Information Overload Leads to Misguided Investments

(March 1, 2012) — An information overload is overwhelming investors and forcing them into a short-term view, a report into equity markets and trading has shown.

Quarterly reporting by listed companies leads to excessive costs and bad decision-making by investors according to an interim review by leading economist John Kay.

The review said: “We gained a sense of overload in both the provision and receipt of information. The Asset Managers and Investors Council (AMIC) expressed the issue with a tone of resignation. ‘Publicly traded companies are subject to a constant flow of information. And although the AMIC feels they do pay too much attention to short term fluctuations in their share price, we believe that this is due to the nature of the environment they are in. They are forced to consider the press and investors’ concern on a permanent basis’.”

The review said having to create and disseminate the mountain of information had added to the overall cost of intermediation, but added that the underlying point was ‘more subtle’.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

It said: “Information was often not wrong, not even necessarily misleading as a description of what it represented, but inappropriate for the purpose for which it was used: and that bad information, in this sense, led to bad decisions.”

The review said versions of the point were made by actors throughout the investment chain, from company directors to trustees.

Kay’s review cited asset management firm Standard Life Investors as saying ‘the noise – positive or negative – arising in response to quarterly interim management statements is an unwelcome distraction in the context of encouraging boards to focus on the long term development of the business’.

The review also suggested the adoption of mark-to-market accounting – and reporting – of corporate pension fund assets and liabilities had pushed them into closing the funds

It said that respondents had believed ‘the result of these provisions had been an acceleration of the closure of defined benefit pension schemes and a substantial reduction in the commitment of UK pension funds to both UK and overseas equities’.

“They suggested that this outcome had not been intended. Respondents also implied, and some explicitly stated, that the result benefitted no one: not pensioners, not the interests of companies which made pension provision, nor the UK economy.”

Kay received submissions from over 80 large investors and stakeholder groups. The final review will be submitted to the UK Treasury.

The Trade, aiCIO‘s sister publication, takes a look at the Kay Review’s thoughts on market infrastructure here.

Solvency II would hurt equity markets as well as force the closure of remaining defined benefit pension funds, a pan-European employers and retirement industry group has claimed.

(March 1, 2012) — Equity markets could be hit and systemic risk would spread through the pension fund investment sector if European Commission enforce insurance regulation, Solvency II, on retirement schemes, trade bodies have said.

A group of pension fund, employer and investment organisations today called on European Commissioner Michel Barnier to drop the ‘illicit assumption’ that Solvency II capital rules are the best way of safeguarding pension provision across the continent.

Barnier today launched a review of pension fund regulation across Europe. Over the past year, stakeholders have been responding with their views on how to improve the system and raise concerns that the Solvency II regulation, which was initially designed for insurance companies, was the wrong fit for pension funds.

A statement from the group today said: “We believe that it is dangerous to apply legislation made for insurance companies to institutions for occupational retirement provision (IORPs). There are fundamental differences between them. Any effort to harmonise the regulatory regime is based on flawed logic and could have unintended consequences on pension plan members, IORPs and the economy as a whole by impeding growth and job creation.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Along with claiming stricter capital rules on defined benefit pension funds would make them unaffordable for most employers, the group said applying Solvency II to this sector would have massive unintended consequences on the wider financial and business communities.

The regulation would see pension fund investors move away from risk assets, such as equities, and buy lower-risk securities, such as bonds. The group said this would take huge pots of money away from businesses that listed on global stock exchanges in search of capital for growth.

“Under the new rules pension funds would likely de-risk their asset allocation, making available less capital to companies to create growth and jobs. Businesses are already experiencing difficulties getting access to credit during this period of economic turmoil,” the statement said.

Jerry Moriarty, Director of Policy at the Irish Association of Pension Funds, told aiCIO: “If pension funds all start pulling out of equities and moving into bonds, yields will be driven down even further and they are already fairly expensive.

“Additionally, the rules would push all pension funds in the same direction, with similar asset allocations. Pension funds have been forced to diversify for years, to help spread their risk, and now they may be about to be forced back into one asset class, with the rest of their peers.”

Moriarty said the situation would be even more worrying should there be a problem with an asset class that had become crowded with institutional investors.

Dörte Höppner, Secretary General at the European Private Equity and Venture Capital Association (EVCA), said: “Pension schemes that guarantee a secure income for millions of Europe’s pensioners are also an important source of capital for long term investors such as venture capital and private equity, which in turn generate income for pensioners by investing in innovation and growth. Applying Solvency II to pension schemes would severely jeopardise this virtuous circle of value creation.”

This morning, Barnier said on his Twitter feed that Solvency II could not be ‘cut and pasted’ from the insurance to the pensions sector, however, in the speech delivered at the launch, Barenier said: “In so far as insurance products and pension schemes are comparable, the regulatory framework should be similar.”