Whose Interests Are We Really Serving?

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Speech delivered by Roger Urwin, Global Head of Investment Content
FEAL National Conference
4 August 2010
The Westin Sydney
Australia

The question is a subtle one: whose interests are we really serving? The interesting extra word - ‘really’. This is beautifully nuanced to bring out that this is a time for honesty at a time when trust is in short supply.

I have lived my life in the retirement funds industry through a time when the demographic time bomb is ticking ever louder. Retiring boomers will have to place their trust in their individual pension pots and their sustainability.

Memo item: retirement sustainability has until now always been covered by a plan B – there has been a bigger working population down the track picking up the tab – for this generation there is no plan B.

For a sustainable retirement system – the mission we should aspire to in our industry - we need three things:

• Adequate contributions
• Fair pensions deals
• Sustainable growth of assets

Brought down to its basics like that we have a sum C for contribution + D for delivery or deal + G for growth (and I know it’s not really a simple sum, but humour me in my simple maths) – does it deliver?

And we are brought back to interests serving question. Does C+D+G add up? If we make it add up we serve the interests of the member. If we don’t, we serve the interests of our own industry.

By the way, this is not an either or situation. We can make C+D+G add up and still serve the industry handsomely for its value delivered and a job well done.

But there’s a big but: if you do the sums – pretty much anywhere in the world – we are letting ourselves down.

The problem starts with C, but the eye-catcher is the G. Investment design and execution runs into a web of problems. And there are three principal ones.

First, we don’t have a governance mechanism that channels the right levels of risk into retirement saving. Whose interests are we really serving by doing this. No-one’s really. It’s just a waste. Good governance is a free lunch that no-one is eating.

Second, we have an expensive and out-dated infrastructure. Whose interests are we really serving with this expensive machine.

Third, we do have a funds industry tail that wags the retirement industry dog. Cooper may not have played every card skilfully, but I think he did well with his weak hand. And on this he has a very good point. We have many investment products where the costs are too great to come out ahead for the value delivered. We account too optimistically and self-servingly for the skills and talents of certain investment segments. In doing so, we all too often serve the industry not the member.

Let me be specific with some targeted bouquets of barbed wire. These are all instances of poor sustainability.

• The unsustainable fees, costs and turnover
• The unsustainable chasing of the latest creation of momentum in past ideas versus the valuation of future ideas
• The unsustainable workings of a system that substitutes the objectives of the quarterly league table for the sustainable proposition of a life-time of absolute returns and ultimate retirement income

This is a global talk that Michael Baldwin, FEAL's CEO asked me to give. I refer to a global problem. But let me get up close and personal with the Australian funds industry. You have the world’s most cultured and intelligent pension system, credit where it’s due, but you have pretty much the world’s worst case of peer group obsession. Your investment industry lacks leadership. Who speaks for the averages exactly? In this you are serving neither your own interests nor your members.

One other take on whose interests we serve – is there a missing piece here - a public interest agenda. In this retirement sustainability challenge is there linkage with sustainable development and technology? If our portfolios progress on business as usual scenarios we will hit increasing resource depletion and environmental issues feedbacks. The low lying externalities of today turn into the higher costs and lower growth of tomorrow with poorer retirement outcomes and retirement unsustainability and inevitability.

I speak for the public interest agenda and enlightened self-interest scenarios with big sustainable investing elements: energy efficiency, renewable energy, water, waste; dialling in fewer environmental issues for our futures and improved fund growth and income spending quality.

In short, the solutions to sustainable pensions and sustainable development and technology share many common elements. We can and should engage funds’ capital in sustainable investing not because it’s ethical but because it makes solid granite finance sense.

This was a pretty ungracious set of remarks from a guest here - you say we’ve been through a GFC, when all this lifts we’ll get the job done. Not so fast we have for a while looked ill at ease in a sea of self-interest and short-termism. This industry segment has its privileges. Where are its principles? Eisenhower’s inaugural address chimed up "A people that values its privileges above its principles soon loses both." I think that is apt as a warning as we try to recover some poise after the failures of the last two years.

The system has had some under-principled players – it still carries some as its liabilities. But it has so many assets – talented people with principles who love the super industry and all it stands for.

The high-principled players need to get out more.