Triennial valuation drives 'short-termism'

Triennial valuation drives 'short-termism'

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Regulators’ insistence on FRS17 valuations; the triennial cycle of valuation and modern portfolio theory are driving pension schemes to think in short-term nominal returns, according to 44% of institutional investors surveyed according to a Hermes Investment Management survey.

The growth in passive management was also cited as a cause for concern; with 61% of institutional respondents believing that large shareholders are likely to ‘become unaware’ of the companies they invest in, forgoing voting rights and thereby losing influence.

“The short-term factors driving the management of pension schemes require detailed attention. Schemes need to have the freedom to act and focus on longer term considerations to best serve their end beneficiaries, savers. As asset managers, we have a responsibility to manage savers’ money as best we can, and that is often not achieved when short-term constraints are applied,” said Saker Nusseibeh, chief executive at Hermes.

“I am stunned that less than one third of investors believe that pension funds should look at the overall quality of life experienced by their beneficiaries, rather than maximising retirement incomes for their members. Surely everyone saving for their retirement is doing so with the goal of the best quality of life they can hope for in retirement. A staggering 49% of investors disagreed with this, 17 percentage points more than those who agreed.”

Other findings from Hermes’ survey, conducted with over 100 institutional investors from across the UK and Europe, found that only 32% of institutional investors believe pension funds should look at the overall quality of life experienced by their beneficiaries, rather than maximising retirement incomes for their members.

Over a third (37%) of institutional investors believe pension schemes focus on investment performance to the extent that they disconnect from their responsibilities as owners of actual companies and 44% of institutional investors believe quarterly results should cease in favour of more long-view reporting.

Other findings looked at the areas in which investors wanted to see innovation. Not surprisingly, disclosure of investment costs was the area in which institutional investors most want to see greater innovation:


·         56% wish for greater innovation around disclosure of costs

·         42% wish for greater innovation around shareholder stewardship

·         42% wish for greater innovation around outcome-focused investing

·         32% wish for greater innovation towards reducing volatility

·         21% want innovation that will enhance liquidity

“Innovation in our industry is critical, as long as the interests of those we serve remain paramount. The desire for innovation around disclosure of costs is of benefit to all as transparency serves everyone and complexity no one,” added Nusseibeh.

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