How passive investments can slash costs for your pension scheme

Published on Friday, 04 July 2014 10:00
Written by Vicki Mitchem

We may be moving into an era of low returns. Cash deposits only give an income of under 1%, and UK government bonds yields are still near historic lows. The 10 UK gilt bond provides an income of just 2.7%.

This means that you need to keep your pension scheme's investment costs under good control, to stop fees and charges taking away too much of these low returns.

It is true that shares and property will provide slightly higher income return, but even here dividend yields are quite low by historical standards. A 1% fee takes more than a quarter of the income produced by UK shares and nearer a half of that from US ones.

There is now a more intense focus on all the costs investment management impose on larger local authority funds. One of the biggest of these is the cost of active management of share portfolios.

It is an expensive task to recruit, train and reward a staff of talented analysts and fund managers to make decisions on whether BT is cheaper than Shell and whether Sainsbury's will outperform Tesco. A few funds do manage to beat the UK index several years running, but the typical experience of actively managed funds is they fall behind the index. That is not surprising, because the fund has to pay the wages of the managers and analysts whilst the index incurs no fees.

"At Charles Stanley Pan Asset we believe that Local Authority schemes should look to save money by reducing the amount of fees paid for active management in the form of picking individual shares for portfolios. There are good cheap trackers available which will give you something very close to the performance of the index without such large management costs. However, this does not mean that we recommend a mute, solely passive approach. Indeed, independent academic research shows that the main influence on how much money a fund makes and how good the total return is comes from the big decisions on allocations between shares, bonds and property, not from which individual shares you hold within a share portfolio.

"You cannot have an asset allocation according to an index: whatever asset allocation you have for your Scheme is a conscious decision and one which will have the most impact on long term returns. With that in mind, we believe that you should concentrate most on the asset allocation decision, which may include a dynamic approach tailored to your Scheme's needs, while doing much of the investing through low cost tracker funds. This will significantly cut the total costs of investment management. It can also lift your net return by saving money and can give you a good reply to the critics who say investment management is costing too much." Said a spokesman for the company.

Charles Stanley Pan Asset works closely with pension schemes to decide on asset allocations and then implement the decisions for the lowest cost possible using passive investments. They will be attending The Future of the LGPS: Collaboration, Cost Savings and Efficiencies on November 18th. 

Source: Charles Stanley Pan Asset

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