Consultants who advise pensions plans on where to invest trillions of pounds of scheme money are on the verge of a massive change, following a recent investigation by the Financial Conduct Authority (FCA).
The investigation, a study of the asset management market, raised concerns within the FCA that competition was not working as it should. The report highlighted issues with weak price competition, sustained high profits over many years and problems in the clarity of investment consultant’s choices. They also cited opaque fee structures and the dominance of just three big companies as cause for further investigation.
Have you heard of the ‘big three’?
No doubt you’ve heard of the ‘Big Six’, in relation to your gas and electricity bills, but you’ve probably never heard of the ‘Big Three’. These largely unknown companies, namely Mercer, Willis Towers Watson and Aon Hewitt, collectively control more than 70 per cent of investment consultancy revenue in the UK. They advise pension funds, charities and insurers on how to invest trillions of pounds of cash, and it is feared they may not have been doing so with those companies’ best interests at heart.
Pensions funds are huge. They make up around 57 per cent of all investments in the UK, accounting for around £1.7 trillion of invested money. In a bid to avoid any further investigation, the ‘Big Three’ proposed reforms to make the sector fairer. These included proposals for compulsory tendering, more transparency over manager performance and other fairness related measures.
However, the FCA decided that these proposals did not go nearly far enough. The FCA are now consulting with the industry as a whole, and will decide by September whether they plan to refer these consultants to the UK’s antitrust body, the Competitions and Markets Authority (CMA).
Pensions funds are concerned
British pension plan providers have voiced concern over the quality of consultants too, floating potential plans to withdraw from this type of investment model altogether. Of a group of UK plans who manage in total around £42bn of assets, 87 per cent said they would definitely be considering a change from the traditional model of consulting, following concerns over conflicts of interest.
Companies cited examples of situations where consultants would often recommend strategies they were personally responsible for in house, or sometimes those of asset managers they knew particularly well as some of the reasons for considering a change. They weren’t convinced that the consultants were offering impartial advice, or indeed recommending strategies for anyone’s benefit but their own.
What does this mean for you?
If you’re reading this as the owner of a pension or other investments, you might be wondering what all this has to do with you. Well, the asset management sector is incredibly important to the UK’s economy, and particularly to people who save. Pensions make up a large proportion of these investments, so it is crucial for all of us that it is functioning fairly and in our best interests.
If you remember, the ‘Big Six’ fuel supplies came under similar scrutiny not so long ago, following the intervention of the CMA, and the outcome of that was very positive for the consumer; lower prices, simpler tariffs and easier supplier switching than ever before. It’s almost certain that the ‘Big Three’ will be referred to the CMA in September, so hopefully the outcomes will be similarly good news. The better our savings investments perform, the more they can grow and the less chance there is of our pensions provider running into trouble before we get our money back.