Prince Charles — the United Kingdom’s long-time and nominally apolitical King-in-waiting — had a go, in a video address to the recent annual conference of the National Association of Pension Funds, held in Manchester on Oct. 16–18, at the adverse impact of supposed institutional investor short-termism and high annual management charges on long-term pension fund investment returns and individual retirement income outcomes.
Real estate professionals have become used to Prince Charles’s sometimes incisive but always controversial interventions on building design and the built environment. In 1984, he famously referred to a proposed extension to the National Gallery in London as “a monstrous carbuncle” and followed that in 2008 with a “pockmarked skyline” warning that proposed office tower developments in London that largely are now being built would produce “not just one carbuncle … on the face of a much-loved old friend, but a positive rash of them that will disfigure precious views and disinherit future generations of Londoners.”
But this is the first time that he has been moved to comment on institutional investment and the aging population. It’s another reminder of who all this money that institutional investors and their investment managers look after, across all asset classes, actually belongs to. And in an era of defined contribution pensions this business of high fund management charges and the consequent impact on eventual individual member retirement incomes matters. According to official figures, a 1.5 percent annual management charge over a lifetime of contributions reduces the available-for-annuity-conversion pension pot by 34 percent; a lower charge of 0.5 percent per year by “only” 13 percent. In money terms, that can make a big difference.
“Surely the current focus on quarterly capitalism is becoming increasingly unfit for purpose?” Prince Charles asked the assembled delegates. “It falls to you,” he told them, “to help shape a system designed for the 21st Century and not the 19th. Make that innovative and imaginary leap that the world so badly needs, otherwise your grandchildren, and mine for that matter, will be consigned to an exceptionally miserable future.” The industry has been put on notice.
Better longevity is something that we all have to deal with — I think we’ll manage, despite all the doomsayers saying that all we’re doing is giving ourselves a life that is longer but with much of the longer part dogged by expensive and life-sapping ill-health — but people also have to recognize that they now need to save more for their longer retirement. Despite what many Europeans think, the state won’t do it for you. We know that one result of the global financial crisis is greater transparency — better information and better communication — between investors, managers and beneficiaries on financial performance, but it is ironic that this often involves the very emphasis on quarterly reporting that Prince Charles bemoans.
Postscript: On Oct. 30, the U.K. government announced proposals to introduce a cap on the annual management charge for defined contribution pension funds. Coincidence or what? Two weeks since Prince Charles raised the issue, that’s quick work. Did someone say “constitutional monarchy”?
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Richard Fleming is editor of The Institutional Real Estate Letter – Europe.
