Rubbing shoulders with the big boys – Can small schemes ever invest like their multi-billion pound peers?
By Ajeet Manjrekar, co-head of River and Mercantile Solutions
For many pension schemes in the UK, irrespective of size, the difficulties of delivering consistent returns to investors is an ongoing one, with the pressure on scheme trustees to monitor performance regularly to make sure they keep delivering for members.
This is ever more pertinent to trustees of smaller schemes, who also have to balance the increasing governance burden with the latest regulation or the incremental costs of running a maturing pension scheme.
Crucially, we do not believe that size is an impediment for trustees having an effective solution. So how can fiduciary management help schemes irrespective of their size on making consistent funding process. We set out below four key tenets based on the experience from our 15 year tenure of providing these solutions to pension schemes.
Economies of scale: One of the principle reasons behind smaller schemes moving to fiduciary management reflects the benefits of scale to drive ongoing management and service provider fees down. All cost leakages ultimately impact on the bottom line in performance terms so it is essential that cost savings are passed onto the underlying client in full.
Dynamic asset allocation: As an industry, there is too much of a “set and forget” culture whereby a pre-defined de-risking framework is deemed to offer a dynamic solution. Market conditions, particularly in recent years, have made it challenging to generate consistent returns. But equally, they have also thrown out opportunities to not only capture return but also protect capital. This should be an essential ingredient to ensure that schemes of any size continue to make smooth funding progress
Niche opportunities: Governance limitations are often labelled as a motivation for fiduciary management. This can be for a host of reasons, including minimum investing levels, due diligence constraints and even the sheer lack of time it would take to assess such options.
However, this should not just be about maintaining oversight over a diverse portfolio of strategies and managers. In practice, I believe fiduciary management should also offer clients access to niche, specialist opportunities. These may be capacity constrained but a nimble fiduciary management can get in early ensuring their clients benefit from seed investor terms.
Bespoke risk management: Smoothing the funding journey needs to balance return generation with robust risk management. This needs to be tailored to each scheme’s specific circumstances and offer the flexibility to evolve over time. Increasingly often, we see smaller institutions implemented segregated liability hedging solutions. This enables the scheme to be more efficient with their collateral allocation accessing a broader suite of risk management tools, e.g. equity protection. This may historically have been perceived as only for the largest schemes.
Professional oversight: Supporting trustees with complete transparency and accountability is paramount to ensuring no “surprises” appear on the horizon. As a result, comprehensive disclosure and reporting should be a standard with the emphasis on “forward looking governance”. Where are you today? What decisions do I need to make to keep making the progress I need?
Ultimately, performance matters net of fees. The reason it ranks above any other challenge for trustees is simply that, without performance (and barring a very generous sponsor) schemes will struggle to have sufficient assets to deliver benefits for their members.