Would you outsource your scheme journey plan in exchange for a known return?
Choosing how you get to your destination
At this time of year many of us will be thinking about summer holidays with more certainty of warmer weather. How we journey to these warmer climes will differ.
For trustees who have decided on the destination for their pension scheme, how do you get there? Can recent innovation in investment solutions help to smooth the ride? You now have new choices, so how do you choose between them?
- Traditional model
- Delegation
- Delegation with increased certainty
Traditional model
Here, trustees select asset managers with help from advisers, and advisers will help decide on how the assets change on the path to the long-term target. This may mean setting triggers for asset changes when the scheme is in a position to reduce unnecessary investment risk. As trustees, you would be responsible for getting it done well.
Delegation
Many pension schemes are moving to investment solutions which pass on asset management decisions to a specialist, fiduciary manager. This approach now accounts for more than 10% of the UK defined pension scheme market. Solutions can be for part or all of the assets. As trustees, you would decide on the solution which works for your scheme. You would also still have responsibility for overseeing the arrangement. Outsourcing does not mean you can close your eyes.
Delegation with increased certainty
Newer options now making a splash in the industry are third party, capital-backed solutions. In this case trustees would agree to the investment strategy and pass the asset management decisions to a third party. The third party will then underwrite a level of investment return or commit that the pension scheme will be fully funded on some pre-agreed target. A commitment like that can’t come for free so the third party also provides additional backing using their own capital. It’s an interesting, and probably growing area of the market, and might be perfect for schemes of a certain funding and risk profile. It would allow trustees and sponsors to reach their long-term target sooner and/or with a higher degree of certainty.
While all options are possible they will have pros and cons and may be more or less appropriate given a pension scheme’s specific circumstance. For example, delegated solutions can bring specialist expertise, access to different asset classes, quicker reactions to financial markets and save money. However, these solutions may also bring additional adviser costs, complexity and governance requirements.
With so many choices, here are some of the important questions trustees and sponsors will want to ask:
How much control do you want to have?
How will any solution increase the chance of you reaching the long-term target? What is the secret sauce?
Are the costs value for money?
Do we have the governance expertise and ability to oversee an outsourced solution, or do we have to outsource that too?
How do you change or exit the arrangement if circumstances change?
Ultimately, how does any revised approach work to the advantage of the scheme members?
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