Sketching the Pension Landscape | Chief Investment Officer

CIO-E-Sept-2015-Story-SH-Sketch-Pension-Landscape-Dadu-Shin.jpg Art by Dadu ShinThe People’s Pension—one of the UK’s biggest multi-employer defined contribution pension providers—organised a small, civilised drinks-and-nibbles event in July. Its mission: Meet finance hacks and get the word out that auto-enrolment is not just about the government-backed National Employment Savings Trust (NEST).

Amid chattering journalists and fund representatives stood a caricaturist, complete with easel, manically scribbling away on less-than-flattering cartoons of almost every attendee—often without them realising until being presented with the finished article.

Surprised with such portraits—both their existence and, frankly, wholly inaccurate depictions—CIO Europe’s staffers took on the challenge of hiding themselves in a small room. Natural innovators, they arrived at a solution: Cornering Darren Philp, People’s Pension policy director, and firm CEO Patrick Heath-Lay to quiz them about the provider’s investment work while using them as human shields. Philp also reluctantly clutched a portrait of himself—or, rather, his torso. That’s what you get for being head and shoulders taller than the artist.

“People do compare us to NEST and other master trusts, but it’s not about us versus NEST,” Philp says a few days later. However, he does admit that the People’s Pension—and its parent organisation, the multi-employer pension for construction workers B&CE—has been worried about NEST’s dominance.

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There is a new master trusts regulatory standard, but it’s voluntary and only three organisations are signed up.

The People’s Pension is at the heart of a dramatically changing retirement landscape in the UK. B&CE has been providing pensions and other benefits to the highly transient construction workforce for 30 years, and so felt well placed to enter the auto-enrolment arena for other industries. Since launching the People’s Pension in 2011, however, the challenges have kept coming.

Already with 1.5 million members from more than 6,000 UK employers, the People’s Pension is gearing up to take on the smallest employers: high street coffee shops, grocers, butchers, and other ‘micro-employers’ that have never dealt with retirement savings.

Philp talks through several elements key to the provider’s success in the next few months and years: namely, engagement with accountants, lawyers, advisers, and other intermediaries to promote the brand. The group’s three core principles of simplicity, helping employers, and engagement are likewise paramount.

Back at the drinks event, Philp did eventually get a proper caricature done. While the sketches of him and his colleagues now adorn B&CE’s Sussex headquarters, more important design work is being finalised. CEO Heath-Lay and his team are at work on an investment proposition that accounts for its rapid growth of membership and escalating demand for liquidity in retirement, following last year’s UK annuity reforms.

In addition, Philp and others have another project on the go—one inspired by Dutch and Swedish pension innovation, and which could have a profound impact across Europe if it proves successful.

“People need information,” he says. “They need a reasonably full idea of what savings they have, but at the moment this is very fragmented. No one knows what he or she is going to get from the state pension, for example.”

Hence the fund’s championing of the ‘pension dashboard concept’. Similar tools are already in use in the Netherlands and Sweden, and other European Union countries are considering implementation.

“It’s an online hub that would allow people to see all of their savings including the state pension,” Philp explains. “If people do want to engage you need to make it easy to do so, and we’re seeing the industry, regulators, and government coming ’round to this idea.”

“All this is doable—the technology exists,” he adds, “so let’s use it to get people engaged, help them, and give them a good service.”

Members will “demand more innovation” from providers in the defined contribution market in the years ahead, Philp concludes, and the People’s Pension is determined to provide it—cartoons or no cartoons.

The vast majority of private equity funds still charge a 20% performance fee on top of “industry standard” annual management fees of 2% or more, research has shown.

Despite mounting pressure from institutional investors on private equity managers to reduce fees, Preqin’s research found that 85% of managers running commingled funds charged a 20% performance fee. In contrast, 48% of separate accounts had such a charge.

“General partners that adapt to the evolving fundraising environment will better meet the needs of limited partners and create long-term, mutually beneficial LP-GP relationships.”In addition, Preqin reported that 73% of buyout funds launched in 2014, 2015, or currently raising money had an annual management charge of 2% or more.

Nearly half (49%) of managers did not charge management fees on co-investments.

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Nearly a third of investors quizzed by Preqin said they were concerned about the level of performance fees, while one-fifth said they were worried about the appropriateness of fee structures.

However, Selina Sy, senior manager at Preqin, argued “some progress” had been made by managers to address fee concerns.

“Far fewer investors are concerned about the level of management fees at present, and at the same time, the proportion of investors that believe their interests are aligned with those of managers has risen significantly,” Sy said.

Investors are increasingly seeking “alternative routes to private equity,” she added, putting the pressure on traditional fund structures.

“General partners [GP] that adapt to the evolving fundraising environment will better meet the needs of limited partners [LP] and create long-term, mutually beneficial LP-GP relationships,” Sy said.

Ted Eliopoulos, CIO of the California Public Employees’ Retirement System, led the charge last month when he gave details to the pension’s investment committee about plans to overhaul and simplify its private equity program.

“What is an appropriate management fee? What level of profit-sharing adequately recognizes a manager’s skill and expertise and also fairly compensates the limited partner for assuming the risk? These are questions that deserve renewed attention and consideration,” he said at a public meeting in August.

Eliopoulos’ remarks came hot on the heels of a letter from representatives of several US public pensions to Securities and Exchange Commission Chair Mary Jo White urging regulatory action on private equity charging practices.