What is it? Trump? China? Russia? New world order? Debt? Proliferation of nuclear weapons? Sorry for you and me it is something more mundane.
What should governments do when pension funds persistently underperform: regulate managers more tightly, empower savers, or accept market outcomes?
Persistent pension underperformance presents a serious challenge to modern democracies. Defined-contribution systems have shifted investment risk from institutions to individuals, yet outcomes remain chronically weak for many savers. Governments therefore face an uncomfortable choice: tighten regulation of pension managers, empower individuals to take control of their retirement outcomes, or accept underperformance as an inevitable feature of market capitalism. Each option reflects a different philosophy of the state’s role in managing risk, responsibility, and inequality.
This essay argues that neither stricter regulation nor passive acceptance is sufficient on its own. While tighter oversight can prevent abuse and misalignment, it often entrenches mediocrity. Accepting market outcomes ignores structural and behavioural failures. The most effective response lies in empowering savers through transparency, competition, and education, while reforming incentives within the pension industry to reward performance rather than asset gathering. Governments should act less as portfolio managers and more as architects of a system that makes good outcomes more likely.
1. The Case for Tighter Regulation: Necessary but Limited
Regulating pension managers more tightly is the instinctive response to poor performance. The logic is straightforward: if professional managers consistently fail to deliver acceptable risk-adjusted returns, the state should intervene to protect citizens’ retirement security.
Stronger regulation can address genuine problems. Fee caps reduce excessive rent extraction. Disclosure rules improve transparency. Prudential requirements reduce reckless risk-taking. The UK’s charge cap on default workplace pensions and the introduction of the Consumer Duty reflect this protective impulse.
However, regulation has clear limits. Excessive constraints often reduce incentives to outperform. Pension managers respond to regulation by hugging benchmarks, avoiding career risk, and prioritising compliance over innovation. The result is safe underperformance rather than dangerous failure. Regulation designed to eliminate downside risk frequently eliminates upside potential as well.
Moreover, regulators are ill-equipped to distinguish skill from luck in real time. Attempts to mandate “good” investment behaviour risk freezing yesterday’s consensus into today’s rules. Tighter regulation can therefore prevent abuse, but it rarely creates excellence.
2. Accepting Market Outcomes: Economically Pure, Politically Unrealistic
At the other extreme lies the laissez-faire argument. Markets are competitive; underperforming managers should lose assets; over time, capital should flow to skill. From this perspective, pension underperformance is unfortunate but inevitable, and state intervention risks distorting market discipline.
This argument has theoretical appeal but fails empirically. Decades of evidence show that capital does not reliably exit underperforming pension funds, especially in default schemes where savers are passive. Behavioural inertia, complexity, and lack of financial literacy mean that market discipline functions weakly in pensions.
Accepting market outcomes also ignores the systemic importance of pensions. Retirement provision is not an optional consumer good; it underpins social stability, welfare spending, and intergenerational equity. When pension outcomes fail at scale, the costs are ultimately socialised through higher welfare expenditure or political pressure on the state pension.
Pure acceptance therefore shifts risk from markets to the public purse. Economically coherent, it is politically and socially untenable.
3. Empowering Savers: The Most Promising Path
The most effective long-term response is to empower savers, not by turning them into day-traders, but by reshaping the system so that informed choice and competition matter.
Empowerment operates on three levels.
a) Transparency and comparability
Savers cannot discipline managers if they cannot understand performance. Governments should require:
- clear benchmarking against global indices,
- standardised reporting of long-term real returns,
- explicit disclosure of opportunity costs and fee drag.
Underperformance should not be hidden behind narrative or complexity.
b) Structural competition
Many pension markets are oligopolistic. Default funds face little competitive pressure. Governments can improve outcomes by:
- consolidating poorly performing schemes,
- lowering barriers to switching,
- encouraging low-cost global investment options,
- facilitating self-directed alternatives for capable savers.
Competition, not regulation alone, disciplines managers.
c) Financial education
Low financial literacy amplifies underperformance. Savers often equate volatility with risk and safety with low returns. Education need not create experts; it need only clarify fundamentals: compounding, diversification, inflation, and fees.
Evidence suggests that even modest improvements in understanding materially improve outcomes. Empowerment reduces reliance on brand, reputation, and authority bias.
