The Investment Association’s chief executive has called for a rethink of “safety-ism” in pensions, as the asset management industry seeks to influence the agenda of the new government. The Financial Conduct Authority’s Nikhil Rathi, meanwhile, has said taking more risk will require society to accept that things can “go wrong”. 

 

Ahead of the general election on 4 July, the Investment Association’s annual conference on Wednesday gave the UK asset management industry an opportunity to share its wish list – and pensions assets are high up on it. Chris Cummings, CEO of the lobby group, argued there should be a shift away from what he considers an excessive focus on security, and more money should stay in the UK.   

“We moved too far towards a culture of safety first, taking the precautionary principle beyond that for which it is designed in attempts to make some outcomes more certain,” he told the audience, adding that this has “resulted in different risks emerging elsewhere that I think pose a greater harm to society”, such as under-provision for retirement.  

The view that longer lives and retirements require a greater focus on investment returns is not disputed by regulators. Speaking at the same event, the FCA’s chief executive agreed that with greater life expectancies, “there is a need for people's money to work harder for them to support them in retirement, and that means a good discussion about the appropriate level of risk”.  

The vast majority of defined contribution members save through their plan’s default option, which tends to have large exposures to equities until some years before retirement. Equities are considered high risk investments with the potential for high returns over the longer term. The FCA’s concerns around DC pensions have to date mainly focussed on poor decision-making in decumulation and a lack of advice.  

The FCA wants to support more investors to assess the right level of risk for them over the long term, Rathi said, adding that this was the purpose of the regulator’s advice/guidance boundary review.
 

   

However, he also reminded the industry that there are two sides to the risk coin. Where there is more risk, “we do need to accept that there is a risk that more things go wrong,” he said. “That acceptance by the industry, that acceptance by society, I think is important.”  

For Cummings, the pendulum has swung too far to the side of risk-aversion in pension investments, including on fees. In DC, he said risk aversion has led to a conflation of price and value. “We must continue to press the case that value is not the same as cost,” he said. 

Framing DC investment in value terms and a desire to see capital allocated to the UK was also advocated by the most recent government, which, among others, led to a watering down of the DC charge cap of 0.75% by exempting performance fees from April last year. In March this year, the Treasury proposed that DC schemes should report their net performance and costs and threatened to bar ‘poor performers’ from taking on new business, while proposing to make DC schemes publicly disclose their allocations to the UK. 
   

   

As well as value, Cummings called for investor scale and higher minimum auto-enrolment contributions. He also suggested the IA would welcome a review of pensions tax incentives, without specifying how it wants to see them changed. 

 

On defined benefit derisking, while it has “a strong internal logic”, he claimed it was the cause of “significant external consequences for UK equity investment and the availability of risk capital”. 

 

The investment management industry is making its weight felt to whoever wins the election as it feels under pressure from growing regulatory requirements and falling revenues, as well as the risk of volatility brought on by geopolitics. 

Assets under management were still growing in the UK as at the end of last year but at 4% were below the European average of 8% as well as the global average of 12%, the Global Asset Management Report 2024 by BCG shows. Revenues are stagnant, while costs are increasing by about 4% year on year, the strategy consultants found. The combination of these factors has reduced industry profitability from 32% to 30%.  

“Lots of other industries would love to be in the same place as this, but as you can see, the trend is down and not up,” said Dean Frankle, managing director and partner at BCG and a co-author of the report, speaking at the conference.  

Passive management makes up a large part of assets at 20% while only accounting for 4% of the revenue, a trend Frankle expects to continue. This shift also means the revenue pool is increasingly dominated by alternatives; about 57% of asset management revenues now come from private assets.  

Fee compression is accelerating, he said, with average fees at 22 basis points last year, down from 25bps in 2015 and 26bps in 2010.  

Asset managers might also need to tighten their belts because growth in revenues has been propped up by capital markets – Frankle suggested as much as 89% was down to market growth. And so, while assets under management went up 12% last year, “it’s probably not going to be as good as that going forward”, he warned.  

And there is a further issue the industry will need to deal with. Costs as a share of revenue have risen to 70%, up from 64% in 2015.   

“The problem is actually more this side, which is when you look at the absolute costs going up, and you look at that as a proportion of revenue, it's going in the wrong direction,” he said. “Clearly this needs to be addressed.”  

Frankle suggested boosting productivity through artificial intelligence. Asset managers already recognise the importance of generative AI and are exploring use cases; about 65% see it as a strategic priority, according to BCG. However, only about 30% are dedicating significant resources towards deploying it, the consultancy found.  

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