The Value Perspective

Point missed

Andrew Lyddon

22 Jun 2012

Some wrong conclusions have been drawn from a new OECD report on pensions.

The Organisation for Economic Co-operation & Development (OECD) has just published a report on pensions and pensions funds around the world and one of its more headline-grabbing findings is that UK schemes performed more poorly over the 10 years to the end of 2010 than any other developed nation aside from the US and Spain.

This has, predictably enough, led a number of high-profile policymakers and commentators to ask all sorts of questions about whether the UK pension industry is structured correctly, if it needs to be better regulated or whether someone should be keeping a closer eye on what pension trustees, schemes and companies are doing.

One of the reasons for the performance differential has been acknowledged as the contrasting approach to asset allocation employed by schemes in the UK and the US compared with elsewhere. The former tend to be much more equity-heavy whereas other schemes, particularly on the continent, are far more skewed towards fixed income.

All this element of the report is really telling us therefore is that, in the period under consideration, equities have done very badly relative to bonds. This is unlikely to come as a surprise to any investor who has been paying attention over the last dozen or so years and can hardly be said to demand a root-and-branch reassessment of how UK pension schemes are structured, operated and regulated.

Setting to one side the question of whether or not 10 years even represents a meaningful timeframe in the context of a pension fund’s investment horizon, at the start of this century equities were as expensive as they have ever been but are now at least cheap relative to their long-term average. Over the same period, bonds have headed in almost exactly the opposite direction and yields now trade some way ahead of long-term average levels.

Making decisions about asset mixes based on this sort of data at this point in time could potentially be a grave mistake. You could essentially be switching out of a reasonably cheap asset into an expensive one and such a course of action, aside from a suspicious resemblance to using past performance as a guide to the future, ignores a foundation stone of value investing – that the price one pays for an asset is the most important determinant of future returns.

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