Risk of almost total pension loss

cedarmay

An article on the excellent Monevator blog made the point that the maximum FSA compensation for authorised UK based funds and organisations is £50,000. This applies per person, per institution.

This suggests that if you have a SIPP or ISA (or both) and have a substantial amount of investments spread among funds with one institution (e.g. iShares, Vanguard, M & G, Schroder etc.) you could lose most of your pension or savings if the worst happened through fraud or negligence or sleepy regulators.

Is this right? Does this mean the only real protection is to spread your holdings between institutions?

bigadaj

It's true but there are multiple layers for most people. It's probably not a bad idea to spread investments across fund houses, even where low cost diversified trackers fro example might suggest lumping a large amount with blackrock or vanguard would be cheap and effective.

The fund groups are large, and the actual assets are normally had in trust so the risk should be low. Personally I'm wary of etfs as they may be synthetic in nature rather than holding actual assets, so akin to a lehmans style coutpnetr party risk.

The funds themselves actually hodd teh shares so the risk of fraud is low, but never impossible.

cedarmay

Thanks. What I think is concerning is that like many investors I have both a SIPP and ISA, and I have a diversified spread of trackers - UK, US, Europe, Japan, developing markets, small companies, commodities etc. But as I near retirement I now have over £50,000 in several of these funds, and with my ISA and SIPP quite a few funds are run by the same investment management companies so the combined amounts managed by Vanguard, Schroder and some others is several times over the £50,000 compensation limit.

Although Madoff type losses only happen a few times in a lifetime it seems that £50,000 is a totally inadequate level of cover for pensions and peoples lifetimes savings.

If the only way to minimize the risk is to split the same asset allocations between multiple investment companies even if some charge higher fees, this is not a great choice and it makes portfolio management even more complicated for self-invested investors.

bowlhead99

If you're holding a bunch of trackers with the same manager, remember that the individual entity you invest in is separate and distinct from its manager. So you might have a Vanguard OEIC and a Vanguard ETF and a Vanguard unit trust, covering different markets. Each of them mostly holding physical shares in global companies (rather than synthetic replication) to get you the exposure.

If "something happens" to Vanguard (insolvency of the management company, or a fraud on one of the other funds) the others are not automatically tainted and lost. You still hold the fund and the fund still holds its assets.

Imagine if Vanguard has $3trillion under management and the CEO has sneakily trousered $300 billion by fraudulently skimming some assets off the top of every fund (so it *does* affect all Vanguard products) without anyone noticing, and then he absconds to somewhere without an extradition treaty and nobody can recover the losses once he gets assassinated.

Your 3 funds each permanently lose 10% due to the fraud. If your total exposure to Vanguard was £600k you have lost £60k and can only get £50k of it back from FSCS. So you are out £10k on your £600k Vanguard portfolio and £0k on your Schroder portfolio. Hardly "almost total pension loss" even though it would be the largest financial crime to ever occur.

cedarmay

bowlhead99 wrote: »

If you're holding a bunch of trackers with the same manager, remember that the individual entity you invest in is separate and distinct from its manager. So you might have a Vanguard OEIC and a Vanguard ETF and a Vanguard unit trust, covering different markets. Each of them mostly holding physical shares in global companies (rather than synthetic replication) to get you the exposure.

If "something happens" to Vanguard (insolvency of the management company, or a fraud on one of the other funds) the others are not automatically tainted and lost. You still hold the fund and the fund still holds its assets.

Imagine if Vanguard has $3trillion under management and the CEO has sneakily trousered $300 billion by fraudulently skimming some assets off the top of every fund (so it *does* affect all Vanguard products) without anyone noticing, and then he absconds to somewhere without an extradition treaty and nobody can recover the losses once he gets assassinated.

Your 3 funds each permanently lose 10% due to the fraud. If your total exposure to Vanguard was £600k you have lost £60k and can only get £50k of it back from FSCS. So you are out £10k on your £600k Vanguard portfolio and £0k on your Schroder portfolio. Hardly "almost total pension loss" even though it would be the largest financial crime to ever occur.

OK I can see that there may not be a total loss if a fraud does not result in a total loss. But what about a scenario with sleepy or complicit regulators and creative accounting (Arthur Andersen and the Enron scandal) and the investment management company is totally insolvent and client funds were not ring fenced?

dunstonh

cedarmay wrote: »

OK I can see that there may not be a total loss if a fraud does not result in a total loss. But what about a scenario with sleepy or complicit regulators and creative accounting (Arthur Andersen and the Enron scandal) and the investment management company is totally insolvent and client funds were not ring fenced?

Don't pick a provider/product where your assets are not ring fenced.

cedarmay

dunstonh wrote: »

Don't pick a provider/product where your assets are not ring fenced.

But I can pick funds from supposedly reputable investment fund managers and in theory client assets should be ring fenced. But that's only the theory. Investors rely on the regulators and the company auditors to provide the necessary checks but history has shown both can and do fail.

Bantex_2

All investments carry a level of risk.

dunstonh

cedarmay wrote: »

But I can pick funds from supposedly reputable investment fund managers and in theory client assets should be ring fenced. But that's only the theory. Investors rely on the regulators and the company auditors to provide the necessary checks but history has shown both can and do fail.

Funds are required to publish their assets. Although some may get listed as undisclosed. If you pick a fund with undisclosed assets then that increases the risk of that investment. if you cannot accept that level of risk then pick investments with full disclosure.

Your_Hero

cedarmay wrote: »

But I can pick funds from supposedly reputable investment fund managers and in theory client assets should be ring fenced. But that's only the theory. Investors rely on the regulators and the company auditors to provide the necessary checks but history has shown both can and do fail.

Can only do your best and spread your investments out. Everything has their own risks - nothing is 100% safe (even government bonds). In my opinion, you are focussing too much on the wrong type of risk.

DaveTheMus

So, you're saying it's possible to lose large amounts of money investing in the stock market? And the government won't make good on the loses we incur? Those dastards......