Kay review to scrutinise intermediary ‘wedge’ earned from pensions savers

The extent to which pensions intermediaries are costing savers money by furthering their own aims will be scrutinised in the Kay Review into into the competitiveness of UK equity markets.

Launching his review of UK equity markets and long-term decision making at the NAPF this morning, Professor John Kay said he wanted to examine the extent to which intermediaries, including fund managers, add unnecessary cost to the retirement saving process.

Kay described the difference between the amount returned by the investment and the amount received by the investor as a ‘wedge’ received by intermediaries.

Kay is charged with examining the mechanisms of corporate control and accountability provided by UK equity markets and their impact on the long term competitive performance of UK businesses. The consultation closes on November 18, 2011, and his final report will be published next year.

His review will also examine whether current rules encourage pension trustees to pursue more passive investment strategies.

Kay said: “The twin objectives of corporate achievement and high returns reduce to a single criterion, because it is only the performance of companies that enables investors to derive sustainable returns from business activities.

“The central role of the professional intermediary creates scope for stimulating better decision-making by both companies and investors, through more skilled and knowledgeable oversight of the activities of businesses and through more sophisticated matching of investment opportunities to the needs of savers.

“A fundamental issue for the review, therefore, will be whether the growth of intermediation has achieved this objective. Or has the proliferation of intermediaries added to the costs faced by savers – what I will describe as the ‘wedge’ between the underlying return earned by the company and that received by the investor. Has it interposed agents with their own objectives that may differ from those of either companies or savers? And, if all these things – more professionalism, higher costs, multiplication of potential conflicts of interest – are true, have the costs of increased intermediation justified the benefits? That is a core issue on which we shall be seeking evidence, both through submissions and from our own research.”

Martin Clarke, chairman of UKSIF, the sustainable finance organisation says: “UK companies must prepare to compete in a changing world. This is a world of environmental limits and social change as well as shifting economic power.

“Everyone has a part to play and we think transparency is key. Corporates should be required to report more fully on their long-term business strategies and how they are managing their environment and social risks over the long term.

“And for asset managers and owners, rather than saying they subscribe to a policy, they should be required to explain in a bit more depth what their policy actually is.”