Most pension scheme members probably have more exposure to Vodafone than to the entire North America...
Most pension scheme members probably have more exposure to Vodafone than to the entire North American market. As stakeholder moves ever closer there has been almost no public debate on what the ideal asset allocation for funds should be. Stakeholder is a long term investment and those who join it should not end up with the sort of asset distribution that has come about from pension fund managers following the herd.
Hugging consensus benchmarks might be a good way of neutralising the risk of fund managers underperforming competitors. For pension holders there is an entirely different risk when exposure to one stock is greater than their weighting to the world's largest economy.
Exposure to US equities now makes up around 4% of the CAPS asset allocation median while UK equity exposure is in excess of 50%. Assuming a position in Vodafone at 10% of the UK market then this gives 5% exposure to a single stock. Even the Government has recognised this as a problem, having assigned Gartmore's Paul Myners to conduct a study of the performance of occupational pension schemes. In a separate move the DSS is already consulting with trade bodies over what an appropriate default fund should look like in stakeholder. As part of this process the issue of benchmarks has raised its head. Investment Week has long argued the default option should be a global fund, not a portfolio based on one market, and many of the major asset managers see lifestyling options as an important part of stakeholder.
The problem here is that no body wants to see the Government and DSS taking on the role of asset allocator referees. There is quite a simple solution to this which has the added advantage of preventing consensus quasi-indexing and of encouraging consumers to pick providers with the best fund managers: get rid of asset allocation benchmarking altogether.
This would allow groups to differentiate their products, prevent fund managers feeling obliged to follow the pack and allow them to concentrate on maximising returns while avoiding risk. It would also put the onus on product providers to come up with a broader range of definitions of what forms an acceptable level of risk for stakeholder funds.
This does not prevent individual regional or country fund managers from using benchmarks, especially in developed markets where major indices are good indicators of the overall state of the economy. The consumer should not be a loser either. The important point is that they get tangible returns which over time build up to provide them with sufficient income in retirement. It would also reinforce the fact that a stakeholder pension is an investment, a factor which is often overlooked in the industry debate on the subject so far.
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