A Finite World

Big news from one of the large investment consultancies – UK pension funds are falling behind their long term targets!

Is anyone surprised? In a low yielding world, actuarial assumptions that require 6% to 8% each year look a challenge and have done for some time. Forget that they are long term assumptions. In three years’ time if those returns are not achieved, the next actuarial valuation will show a higher deficit and trustees will be going cap-in-hand back to the sponsor.

Most trustees will be in the same boat. After all, most pension funds follow very similar investment strategies, invest in the same asset classes and use the same fund managers.

The elephant in the room, however, is that there is only so much return to go around; returns are finite. The problem is, when the average return is lower than the rate required by pension schemes, and everyone is doing the same thing, taking the same advice and investing in the same markets, most will achieve the average or something not far from it. They will underachieve.

It is classic groupthink mentality – it is all about harmony and conformity, about safety and size, rather than giving oneself the best chance.

However, there are some that do better than the average, that give themselves the best chance of achieving their long term objectives, and they are the ones that invest away from the herd. By pursuing less crowded asset classes and strategies, risk can be reduced, and the chances of achieving those actuarial assumptions is vastly improved.