Workplace Pensions Blend Active and Passive Funds to Boost Savings

How are the institutional investors using active and passive strategies to invest for your future? We examine how the pension charge cap is shaping what's in your pension pot

Emma Wall 19 June, 2015 | 12:39PM
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All this week we are running a Guide to Active and Passive Investing to help you, the investor, make smart choices for your portfolio.




Emma Wall: Hello and welcome to the Morningstar Series, Ask the Expert. I'm Emma Wall and I'm joined today by Annabel Duncan from JPMorgan.

Annabel Duncan: Good morning.

Wall: Hi Annabel.

Duncan: Hi.

Wall: So we're here today to talk about pensions. It's part of our Active and Passive Week, and I thought we could talk about what the professionals are doing to save for their customers, their clients, investor's retirement and what investors can learn from that. So with that in mind, what are professional investor's DC pension schemes using active and passive in order to hit retirement goals?

Duncan: Well I think the answer really to that is they are using a combination of both. Plans for long-time now have used both passive equities for example and then maybe more active strategies like DGFs and they've used a range across fixed income and emerging markets for example.

Wall: Is it about picking products for specific goals, or does it change as people approach retirement, or is it sort of best use for individuals?

Duncan: I think really it's about, thinking about the whole journey rather than just one point in the glide path, and I think that you – the important things that you need to remember are about diversification benefits, and there will be certain types of investment that more easily or more efficiently done through an active approach and maybe others that you could look at either active or passive.

Wall: And of course JPMorgan Asset Management is an active house, but looking at the retirement solutions part of the business, you do say that passives have a place in retirement planning?

Duncan: Absolutely. I think the debate needs to stop being quite so religious, it's not one or the other and I think particularly in light of the charge cap, it's important when you are thinking about glide path that you think both about the cost and the impact that will have on people saving, but also thinking about the diversification that you need to get from different types of investments.

Wall: And you touched there on the charge cap. This was something that was – it was initially introduced and then pushed back, but it is still quite a new concept, it's 0.75% and that for a lot of people, has alarm bells ringing, that it will restrict what people can hold within their pension plan. It will mean that perhaps some fantastic though expensive fund managers or asset classes which is slightly more illiquid and so may cost more such as commodities or alternatives may no longer be able to part of a person's pension plan and what you say to that?

Duncan: I think it's true and I think it is a challenge. It is clearly still possible to able to deliver a broad level of diversification within the charge gap and you have to remember that there are administration costs as well, they are included within that 0.75%. However, I think it is important to recognise that there will asset classes that it will be much more difficult for plans to include for their members to be able to benefit from that higher offers you say or diversification.

Wall: And if it is something that you are concerned about as an individual, you always have the option to move out of the default, because this charge gap only does apply to default pension schemes, is that right?

Duncan: That's absolutely correct. I think the thing that people who are saving need to think about is whether or not they are going to be better placed outside of the default, will they look at their pension regularly, do they feel comfortable managing their own investments for such a long time horizon 40, 50, 60 years and do they feel that they are going to do that regularly and make sure that they are checking in.

Wall: So perhaps not for everybody, but if you are an informed investor who is worried about the restrictions that charge cap may imply then it is an option?

Duncan: Yes, absolutely, I think is an option. What we have seen, however, generally in the U.K. market though is there is a very small percentage of people who feel comfortable doing that. And typically there is a good governance structure in place with your work-based pension and they will be looking at those things like diversification, and value for money and thinking about those long-term goals.

Wall: Annabel, thank you very much.

Duncan: Thank you very much.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar