Pension reforms fuel passive curiosity

But she notes: “The way these are being used is changing. Ten years ago, most DC schemes used an index fund as the default fund; now, most want more diversification through a multi-asset fund. Index funds fit into this model. Risk and return differentials between asset classes are, generally, higher than differences between managers in an asset class.

“In other words, the mix between UK and overseas equities may have a greater impact on performance than manager choice. In our view, pension schemes are better off using their time to determine strategic asset allocation – which can then be implemented cost-effectively using index funds.”

Meanwhile Rima Haddad, head of UK institutional distribution at ETF Securities, notes the pension changes in the UK pose challenges for clients, with two key themes being cost and transparency.

“ETPs are generally cost-effective, particularly when compared to traditional mutual fund structures. The reforms will also require independent governance committees and trustees to consider costs and charges, and the FCA is looking at introducing regulations about disclosing transaction costs.

“Across Europe, we are seeing regulation that is placing end savers at the centre of the investment process. We expect this to continue, particularly in the pension industry.”

Many might appreciate the potentially higher returns of a fully active investment approach. But with market volatility expected to continue and pension regulation tweaks an almost annual occurrence, the issues of risk and cost mean passive options should not be ruled out when looking at pension portfolios.

Nyree Stewart is features editor at Investment Adviser