As the recent PMI/Schroders Solutions governance survey highlights, Trustees of many UK DB Schemes will be revisiting their investment governance arrangements in 2023. Even those who came through the turmoil of the autumn relatively unscathed will want to understand what happened and how best to prepare for any future market or fund stress.
My observations formed from a career immersed in investment are as follows:
The attraction of diversification – For many good reasons, most DB Schemes have assets spread between multiple asset managers and/or multiple funds. The attractions of diversification by style and manager have been well made over the years and there are very good strategic reasons why this makes sense in terms of overall investment risk reduction and return enhancement. However, this approach means that an increasing number of gaps are created in a scheme’s investment arrangements.
The operational gap – In normal circumstances, the fact that assets are delegated to different asset managers, using different custodians, transfer agents, brokers, pooled fund structures and legal agreements is ‘just’ a reporting challenge. A Scheme’s combined assets are aggregated by the consultant, a platform or in-house team to produce the holistic picture for the Trustees and any asset moves can be handled over a period of time. In other words, the operational gaps have been “papered over”. However, in times of stress this all falls by the wayside, as was painfully highlighted in the autumn.
Assets are chosen for sale, potentially at depressed values, based on the speed at which they can be converted to cash and some of this is then trapped, even if temporarily, in a different place from where it needs to be. None of this is intended as a criticism of anyone involved in the process, but now that the issue is recognised, we all in the pension industry have an incentive to try to avoid it happening again.
Filling the gap – In my view, the best way of filling the gaps, where possible, is by weighing the attractions of manager and fund diversification carefully against the operational simplicity of a reduced number of counterparts. Many years ago, most Schemes would have employed a balanced manager running all the assets. I can imagine that faced with the LDI turmoil, such a manager would have made timely and pragmatic decisions on what to sell, to whom, at what price and when, in a coordinated manner including input from strategy to trading and settlement. We’ve lost that integration with the move to specialisation and maybe now is a good time as Trustees to wonder if we have gone too far.
A rethink about how best to implement investment strategy will take time. In the meantime, Trustees need to recognise that these gaps exist, have a clear map of where they are, and an understanding of how they to bridge them as a priority.
Is AAF fit for today? What should Trustees be considering? AAF 01/20 reports began appearing in 2007 providing assurance to trustees and the administrator that
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Amanda is a Board Director of Pi Partnership Group and leads the development of Pi’s services. She works closely with clients, the Pi team and professional advisers to ensure all of Pi’s services meet the changing needs of the pension market and deliver clear value to Pi’s clients.
Amanda has over twenty-five years’ experience in the pensions industry and, as well as ensuring Pi’s services continue to meet the needs of our clients in a rapidly changing pension landscape, is also a member of Pi’s Executive Management Team. She provides specialist project management for clients on a range of services, including adviser selection and review, trustee board assessment and governance design.
As well as being a Fellow of the Pensions Management Institute (PMI) and Chair of the PMI London Group, Amanda holds PMI certificates in Pensions Automatic Enrolment and DC Governance, was a past Prince2 practitioner and is a Certified Risk Management Practitioner.
What do you most enjoy about your role: Successfully delivering complex projects and creating a happy team environment.
Interests outside work: Travel, theatre and as part of Abundance London helping create beautiful spaces in urban settings.
Top achievement to date: Competing in the 2005/06 Round the World Clipper race.
