Smaller schemes face the same challenges as big ones, but with fewer resources. Padraig Floyd looks at how they can find success
If there’s one thing you want to be in the world of occupational pension schemes, it’s big. The market is built around big schemes. They generally dedicate more time and resource to governance, they have sexier investment strategies for their bigger pools of assets and, of course, they have more money to spend on all these things.
Richard Butcher, managing director of PTL, says that the holy grail of buyout or some other de-risking strategy is as distant a dream for many small schemes as it is larger ones, and in fact, they face pretty much the same problems – whether defined benefit or defined contribution – as their bigger cousins.
Fewer resources to fix any problems means you have to be smart in how you make use of the limited resources available.
“First you need to identify and mitigate any risks and work out what it is the trustee is doing, and that requires some basic legwork,” says Butcher. “Once you have discovered where the real significant risks are – and most are around the employer – you can start to draw up a plan.”
You must also think beyond the risk of the employer – and how you can reduce the impact in the event of the sponsor’s insolvency – to how you can reduce risks to the employer itself.
RULES OF ENGAGEMENT
Before implementing any strategies, or abandoning existing ones, it is important to determine whether your governance structure is right, says Alan Collins, head of trustee advisory services at Spence & Partners.
Bite the bullet and commit resources to running the scheme or delegate it away to a third party”
“Irrespective of where you are in terms of technical provisions, the governance structure that supports everything else must be streamlined, proactive and be able to make decisions quickly.”
If the wheels turn slowly and it takes months to do anything, your governance process isn’t fit for purpose, says Collins, bite the bullet and commit resources to running the scheme or delegate it away to a third party that can do all these things on your behalf.
Two things, he says – investment performance and employer contributions – will produce success for your scheme.
When looking at the governance structure, there are certain key elements to get right, says Deborah Cooper, a partner at Mercer. They are the same problems faced by big schemes, but often have been overlooked due to a lack of oversight, or a lack of time and resources. Either way, they need to be addressed quickly.
“The first thing that will have already been determined is whether the trustees can devote enough time to the role,” says Cooper. “They must understand their scheme rules and the powers it gives them and the employer.”
Next, if there isn’t a robust plan for addressing individual conflicts of interest, put one in place, she says. Then consider the risk profile and risk tolerance, which are not the same – with the employer included in the conversation – and develop an appropriate plan of action.
Then it’s time to check the data is up to date and accurate. It rarely is in schemes of any size, so this is a great place to start.
TAKE YOUR PARTNER…
If you haven’t already appointed an adviser, here is the time to consider it. Many small schemes deal directly with providers or corporate independent financial advisers who may not have the necessary breadth of experience in occupational schemes.
This is a perennial bone of contention for small schemes, who often feel short-changed when they appoint a large consulting firm, but Cooper says that their expectations should be no different from those of large schemes.
You need to not only review advisers, but review the purpose of the adviser”
“They should expect to get good-quality advice that takes their specific circumstances and needs into account,” says Cooper. “In some aspects the depth of advice will differ from that provided to trustees of large schemes. It is likely to be more directional to avoid more complex solutions, which might not be available because of the cost.”
Yet anecdotal evidence suggests many small schemes that look for an alternative end up on a treadmill of two or three firms with little actual difference in service offering. Before then, a far more fundamental decision needs to be taken.
“You need to not only review advisers, but review the purpose of the adviser,” says Collins. “For instance, the role of the actuary is more restricted these days as schemes mature, and they really have to justify their seat at the table by offering proactive advice and help instead of just crunching numbers.”
One area small schemes are not well served by larger firms is administration, says Garry Wake, managing director of Trafalgar House. They are often seen as not being worth any time or investment as a client.
“As a result, they often don’t even get automated as they should be and it’s not unusual for a small schemes to be an administered on spreadsheets or manual checklists,” says Wake. “Dodgy data and manual processes means things will inevitably go wrong.”
However, going somewhere else may not fix the problem – there is a belief in the industry that the only thing that changes is the name over the door and on the invoices.
“In recent years, there has been an emergence of tier-two providers that want these small clients and that has to be something worth looking at, as moving to a new provider is a labour-intensive and costly thing to do,” adds Wake.
FINGER ON THE BUTTON
Reviewing existing strategies and changing providers is all well and good, but in every scheme – and especially small ones where nothing may have been done for years or even decades – it is data that should be the trustees’ priority.
Every day, data gets a little worse, and yet it is at the very centre of everything a scheme does.
Too much trust is placed on investment managers, providers and administrators”
If there are any doubts, get them sorted out. Even if there aren’t, take some time to see if anything has been missed, otherwise the costs that have been overlooked, such as historical payments, not closing to accrual properly, a salary link you didn’t know was there – will be crystallised.
It will also cost a lot more to put right, or, if you are lucky enough to be considering de-risking or even buyout, result in a 20% to 30% data premium plastered on the fee because the insurer has doubts about the data.
“Too much trust is placed on investment managers, providers and administrators,” says Collins. “If you don’t have the correct data, the objective you are targeting will be unattainable and everything you do a waste of time.”
MORE CHOICE, BETTER VALUE
Much like Formula One, the technological innovations developed by the big players have cascaded down to the smallest of schemes.
Access to investment platforms and fiduciary management or delegated chief investment officer services offer undreamed of riches. In the past, trustees of small schemes would have given their right arm for such services, only to find it would have cost them a leg as well.
Fiduciary management and even liability driven investment – essential for the mature scheme – can be done through platforms and pooled funds, and so small schemes should be weighing up all the options when they are reviewing their strategies.
“It simply isn’t true they are too small to do anything better than before,” adds Collins. “There are few schemes that are too small to benefit from the innovations the market offers today.”
The ultimate objective of every scheme is to pay the correct benefits on time to its members, and putting your house in order can only make this easier in the long run.