Home / News / Reject passive, return to active for pension funds

Reject passive, return to active for pension funds

News

Active management will be increasingly important for defined contribution (DC) retirement savings schemes as value-for-fees, expected lower future returns and sustainable investment preferences come to the fore, according to a new MFS white paper.

The analysis says the rising exposure to index investments in DC schemes has been built on at least three “misconceptions about active versus passive that need to be corrected”, namely that passive leads to better retirement outcomes; that future performance will match historical returns; and that fiduciary duty excludes sustainable investing.

For example, the MFS report says scheme managers must consider a wider range of features other than price when choosing underlying funds or designing investment options.

“Fiduciaries should not simply choose the least expensive funds for plan members; rather, they should follow a well-documented, process-oriented, ‘fee for value’ framework for fund selection,” the paper says. “This concept becomes even more important when looking at target date funds, for which glide path design, asset allocation and investment process will be the drivers of successful retirement outcomes.”

As well, the study says future returns are likely to fall below recent historical levels, putting passive performance assumptions under pressure.

MFS estimates a typical balanced portfolio of 60 per cent equities and 40 per cent bonds will return an annual 3.2 per cent and 5.8 per cent over the next 10 and 30 years, respectively: by contrast, balanced fund investors received an average 9.1 per cent and 7.8 per cent annual return over the past respective 10- and 30-year periods.

“We believe that investment returns in the next decade will be markedly lower than they have been historically, and skilled active management can play an important role in helping members achieve the additional returns needed to meet their retirement goals,” the MFS report says.

“Accordingly, we believe that following a prudent fiduciary process in the selection of actively managed strategies can greatly benefit plan members in achieving their retirement goals while also offering them an opportunity to access sustainable investments through an integrated approach.”

Furthermore, the paper says increasingly important environmental, social and governance (ESG) factors require an active approach.

“While active management has always played an important role in retirement plans, today’s environment has added new layers of complexity to the active versus passive debate,” the paper concludes.

“With returns likely to be lower in the coming years than what we have seen over the past decade and environmental, social and governance (ESG) issues growing in importance for retirement plan sponsors, we believe that skilled active management will be critical to helping plan sponsors and members sort through these complex issues as they work towards successful retirement outcomes.”

The ‘Back to reality’ report was authored by MFS head of investment solutions group, Jonathan Barry, and Sarah Donohue, consultant relations managing director.




Print Article

Related
Why taming the inflation tiger will be harder than the 1970s

Inflation is making a latter day comeback, and a financial system “sanitized by 15 years of free money” is totally unprepared. It’s time, once again, for tough medicine. Inflation hasn’t been this high in 40 years, but investors have become convinced that central banks can still tamp it down it with relative ease – a…

Lachlan Maddock | 27th May 2022 | More
Bragg offers a super manifesto (from opposition)

One of the Coalition’s few surviving  “super soldiers”, Andrew Bragg has called on his party to go further down the route of “flexibilising” super – if not abolishing it completely. Senator Andrew Bragg finds himself in a curious position following Labor’s election win. He’s one of the few super partisans to survive the teal clean…

Lachlan Maddock | 27th May 2022 | More
Appen left at the altar. Market heads lower. Good week continues for US markets.

Appen left at the altar A bizarre blink-and-you-missed takeover approach came and seemingly went for one of the local market’s tech leaders Appen, which develops the datasets for machine learning and artificial intelligence. Canadian company Telus International sprang a $9.50 a share bid on the company, which said it would talk to Telus to try to…

Drew Meredith | 27th May 2022 | More
Popular
1
News and OneVue go live with brightday
Alec Law | 11th Jan 2015 | More
2
Perrignon off to HK with Credit Suisse
Alec Law | 22nd Dec 2013 | More
3
Sports betting as a new asset class
Alec Law | 3rd Jul 2016 | More
4
BlackRock ahead of consensus with bullish view
Alec Law | 14th Jan 2017 | More
5
Statewide seeds bespoke Apostle fund
Lachlan Maddock | 23rd Mar 2022 | More
6
UniSuper’s VC foray a sign of things to come
Lachlan Maddock | 25th Mar 2022 | More