David Blackman interviews the most influential economist in Britain on the Budget, charges and his quest for long-term investing
John Kay is a few minutes late when I turn up at his mews house pied-a-terre near Paddington station. But he’s got a good excuse.
The eminent economist, who will be keynote speaker on the second day of PI’s Workplace Pensions Live conference, has been at the Business, Innovation and Skills department for an update on how his wide-ranging report into long-term investment is being implemented.
“I can’t not say things are going fine,” he says, before adding the caveat that the Vince Cable-commissioned review’s ultimate success will be achieved via “long-term cultural changes” rather than quick-fix solutions.
He is clear though that the keys to better investment decision making lie in the hands of asset managers rather than pension fund trustees.
“I am sceptical about whether the majority of pension fund trustees have the time and the capacity to exercise that kind of function.
Pension funds should be willing to trust their asset managers to perform over the long-term
“What is much more important is the relationship between pension fund trustees and the asset managers and the relationship between the asset managers and the investee companies because the vast majority of pension funds do and should use asset managers.
Pension funds should be willing to trust their asset managers to perform over the long-term, he argues.
It is absolute performance that pays people’s pensions in the end
“Performance is measured far too often: absolute performance not relative performance matters and it is absolute performance that pays people’s pensions in the end.
Too often, he adds that trustees are suckered by “regulation that has imposed frequent reporting and an attitude to short-term performance monitoring that is inimical to long-term investing.”
And he applies these principles to the trusteeships that he holds on the pension funds of his Oxford college St John’s and the trustee firm Law Debenture. He also chairs the independent trustee firm’s fund, a position that he jokes is “rather strange - it’s a company with more pension fund expertise than the average.”
I discourage my colleagues from having a conversation about why they have underperformed over the last few months
“We have a conversation with the asset managers every 6 months but I discourage my colleagues from having a conversation about why they have underperformed over the last few months. The point that you say ‘you are 2% behind the benchmark’ is the point where the relationship has ended.”
And he admits that he would tolerate underperformance by his fund managers “potentially for ever”.
“It’s absolute returns paying the pensions and if somebody is to generate stable, long- term returns, the fact that somebody is getting better than me should not bother me because I’m getting what I wanted.”
And he is fully behind pensions minister Steve Webb’s move to curb pension charges.
“The basic problem is this process costs far too much”, he says. As an illustration, he refers to what he describes as “the most staggering sum I’ve ever done”.
If Warren Buffett had charged himself hedge fund management fees, he would have received just 10% of the returns
This showed that if Warren Buffett had charged himself hedge fund management fees, he would have received just 10% of the returns he has received. He describes this as “the most forceful way I have seen of illustrating the cumulative, compounding effect of charges over a long period. “
“Especially with the very low rates of return we can’t get serious provision for retirement if a large fraction of that return is going straight into charges.”
As for the Budget though, he expresses concerns about the impact that Chancellor George Osborne’s move to liberalise the annuity market will have on pension saving.
“If what we are doing is helping people to get better pensions, then I’m sceptical - it’s designed as an answer to the problem that we have at the moment, which is ridiculously low annuity rates.”
As such, he agrees with the suggestion that the Chancellor’s move may prove to be long-term answer to what could prove to be a short term problem.
The idea that there’s a roulette wheel component in what you get when you retire is not something that one can be happy with
He predicts that the result of Osborne’s move to liberalise the annuities market will be an increase the equity component in individuals’ defined contribution portfolios.
“That’s got to be a good thing because it’s hard to think that long-term returns from equities are not going to be at this level a lot better than long-term returns from gilts.”
However he warns that the downside of this shake-up will be the exposure of retirees to a greater degree of investment volatility, which could prove a disincentive to making provision.
“The idea that there’s a roulette wheel component in what you get when you retire is not something that one can be happy with from a straightforward fairness point of view.”