Pensions World

Investment committees are so transfixed by regulation they are missing the bigger picture, says Anthony Hilton, Evening Standard

If you are a member of the investment committee of a pension scheme, then the big issue ought surely to be what is happening in the global economy, what those events are likely to mean for markets and, given what one expects markets to do, whether the fund is as well positioned as it could be. This is not a formula for chopping and changing the portfolio every three months, but it is an effort to pick up on the major trends and themes of the global economy.

If the view is that we are in for a 20 year commodity boom – the super cycle which has excited so many people – then the portfolio should reflect that. If the view is that inflation is about to return with a vengeance, then that requires an adjustment to investment thinking. If one believes that all the world’s growth for the next decade is likely to be in the BRIC (Brazil, Russia, India, China) countries and Asia while the mature economies of Europe and the United States continue struggle, then that should guide investment decisions. If the likelihood is that a shortage of credit will be with us for years and that there is still a great deal of deleveraging still to come, then that should conditions one’s attitude to commercial property.

Process rules

Yet the common complaint one hears from members of investment committees is that these matters rarely get onto the agenda and discussion rarely takes that form. Rather, investment committees, like so much else in the pensions world, are now dominated by process and compliance. The basic thrust of a meeting will be to monitor whether the portfolio continues to reflect the blueprint of asset allocation and risk laid down by its consultants, whether the active re-balancing is working or whether further minute adjustments are necessary to get it back on track. There is an obsession with detail, a focus on the relatively unimportant and a refusal to embrace the big picture.

This is what you find, too, when dealing with those consultants who specialise in assessing fund management groups, with a view to separating out those which they think are good from those which they think are less good. The basic challenge the consultants face is that successful investment is, like so many other things in life, 95% perspiration and 5% inspiration. Unfortunately for the consultants it is the perspiration – or as they prefer to call it the process – which lends itself to scientific measure and which they seek to assess, whereas it is the inspiration which makes the difference. That is the bit which cannot be measured – the art not the science.

Writing on the financial crisis in a paper for the think-tank, the Centre For the Study of Financial Innovation, Michael Mainelli and Bob Giffords made a telling point. “Regulators tend to focus on process”, they wrote. “The process is not changed until things go wrong then regulators respond by adding to the process, ostensibly to reduce risk. The process becomes more complex and people become buried in procedures to the detriment of outcomes.”

Common sense needed

This surely is the point. Process has its place, but it should be servant not master, yet when it interacts with regulation and when trustees carry with them the fear of future litigation, then too often it becomes an end in itself. We should have learned from the credit crunch not to have blind faith in economic and financial models. When those models come up with answers which fly in the face of common sense, then we should trust common sense.

One of the insights of Lord Keynes, the 1930s economist whose thinking has become fashionable again, was that it is better to be roughly right than precisely wrong. But that is not how it works in the pension world. No one seems to care that, once again, if the maths is wrong, the answer will be wrong and policy based on that answer will again be disastrous.

Anthony Hilton is financial editor, Evening Standard;
Anthony.hilton@standard.co.uk