Fund managers' and pension funds' dedication to pursuing short-term investment goals is causing severely reduced returns, a panel of MPs heard.
Dr Paul Woolley, who runs the Centre for the Study of Capital Market Dysfunctionality, told MPs on Tuesday the "lush returns" enjoyed by pension funds in the 1980s and 1990s were unlikely to return but pension savers could realistically now expect 3% or 4% per year, in real terms.
But he said costs associated with fund management were eating into returns, adding short-term investment goals were limiting overall pension fund returns.
Woolley told the business, innovation and skills committee: "The reason it is not 3% or 4% is partly due to the costs of the finance sector, which amount to 1% to 2% per year being taken off your pension [management costs].
"Hedge fund costs, the brokers, the whole caboodle."
He added: "It is also fact that the finance sector is prone to crisis. That imposes a huge cost to the economy. If we get back to growth what one should look for in a return is 3% real, add 1% or 2 % as an expectation. The target that pension funds should aim at is a benchmark of real growth of global GDP, plus location inflation."
Simon Wong from the London Stock Exchange added: "There is a cultural issue - clients are obsessed with short-term issues, so fund managers are. That needs to change."
The select committee was meeting to analyse the outcomes of the Kay Review, which investigated the UK equity markets and long-term decision making affecting investors, such as pension funds.
Woolley said financial regulators also needed to be educated. "We need to change to a stable, long-term cash flow benchmark. Focus on long-term performance.
"From the regulator's point of view, they should not impose short-term mark to market. They are trumping every attempt investors might take to be long-term. The regulators need to be educated as well."
Catherine Howarth, chief executive of lobby group FairPensions, said the problem of short-termism and costs would become more important as auto-enrolment increases.
She said: "We have got about seven million saving for a workplace pension, that is going to grow significantly through auto-enrolment. A very large number of UK citizens are going to be committed to auto-enrolment where their hard-earned money will be committed to agents in the hope that they are going to look after them well.
"Returns in the future may not be as juicy as in the past. That is all the more reason to iron these issues out of the system. Good governance, scrutiny is essential to getting that right.
"The saver must be at the heart of the system."
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