The Big 4 accountancy firm recently conducted a study among 50 large public and private stakeholders in Europe and the US, including government bodies, policymakers, pension funds and asset managers.
Together, they manage more than ten trillion dollars in assets. This is the third time EY has conducted a study of this size into pensions. But this time, the firm was not looking so much at the changing legislation in the pensions sector and the administration of pensions.
Instead, they were asking respondents to answer questions geared towards asset management, according to Nicolette Opdam, a partner in charge of the pension law and financial law practice at HVG Law, which has a strategic alliance with EY Tax Advisory, and involved in the study in that capacity.
Not prepared
“What we looked at in particular was whether the asset management sector is changing as quickly as the pension sector expects. How are they preparing for the increasing demand for investment products and solutions, and what are they doing to protect their business model now that pension funds are starting to do more themselves in terms of alternative investments?”
Asset managers could use some input into adapting their business models to the demands of pension funds and their clients. Some 30% of respondents admitted that they cannot manage every client with a matching governance framework.
“This means that clients who request special portfolios or want asset managers to implement a specific strategy can’t always get what they want.”
More b-to-c communication
Does this have anything to do with increased legislation? “Yes and no,” according to Opdam. “Of course there is more regulatory pressure, but parties still need to set priorities. They have to realise that pension models are no longer the same everywhere. Pension funds are not homogeneous, so no longer a case of one-size-fits-all. Pensions are becoming more individualised and the pension fund is no longer the (only) client. The client is increasingly the pension fund participant, the consumer. Asset managers need to adapt their organisation and communication from b-to-b to more b-to-c."
Some 34% of the respondents in the study admit that their business operations are not prepared to handle the increasing growth and complexity in the pension sector. Additionally, 42% of the pension funds believe that the growth in managed assets is putting pressure on the business models of asset managers, which means these need to be adjusted.
“Perhaps we will see more cooperation between pension funds and asset managers.” EY also asked the respondents about their opinion on costs and returns, which are two hot items in the investment industry. Some 76% believes the lower returns and costs are putting pressure on investments.
More alternative investments
Opdam: “Asset managers will have to reduce costs so they can invest more in their own future. More digitisation, fintech, can help them with that. However, we feel that it is also possible for them to reduce costs internally. For example, they could ensure better cooperation between departments, and between pension funds and other investors, as I’ve already noted.”
Another thing that stands out in the study’s results is the interest among pension funds, not including hedge funds, in alternative investments. “They are increasingly looking for agricultural land and illiquid debt to invest in. They no longer want to do this through asset managers, but are bringing in more people themselves to manage alternative portfolios internally.
Asset managers that can offer the right products and services in terms of alternative investments will certainly profit from this trend.
EY research reveals 10 hypotheses:
- Governance structures are not aligned with size and complexity.
- Investment operations and operating models need recalibration.
- Scrutiny challenges partner and outcome management.
- Technology is creating organizational challenges for providers.
- Member and public scrutiny and fee pressure are driving insourcing.
- Low returns and fees elevate pressure on cost to invest.
- Lower returns are driving more investment into alternative asset classes.
- Investment governance and operations are lagging.
- Operational maturity is not aligned with size and complexity.
- Investment risk governance and solutions are not aligned.
Josef Pilger, Global Pension & Retirement Leader at EY, is one of the debate moderators at WorldPensionSummit this Wednesday and Thurday (October 25th and 26th) in The Hague.