Rubbing shoulders with the big boys – can small schemes ever invest like their multi-billion pound peers?

June 17, 2019

For many smaller pension schemes in the UK, 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.

There are many challenges facing trustees of smaller schemes, and performance is but one of them, and it is one of the things that should be higher up every trustees to do list.

The reason it ranks above other concerns is simply that, without performance (and barring a very generous sponsor) schemes will struggle to have sufficient assets to deliver benefits for their members.

One thing that has often presented problems for smaller schemes has been one of access. Whilst nearly everyone agrees that having as wide a pool of assets as possible is a good thing in terms of generating returns, the reality is many small schemes can still struggle to access certain investments.

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, with recent comments from the regulator focused on how smaller schemes are struggling to deliver value, is there a need for a different approach?

Options

Pension schemes have a number of objectives when it comes to ensuring they deliver for members, but paramount to all of them is the concept of delivering performance net of fees.

That is, after all, the only way schemes can ensure they grow assets and thus meet members’ benefits now and into the future.

In terms of how they go about achieving this, smaller schemes can of course consolidate, and that is a concept that is becoming increasingly popular.

However, another way for them to get ahead is to turn to fiduciary management. A form of asset pooling, fiduciary management services provided by a third party not only bring in professional investment management capabilities, but also access to a wider pool of investable assets.

This gives a small scheme institutional-style investment management via the third party, meaning access (thanks to their scale) to the likes of investments enjoyed by the largest schemes in the UK, and crucially at the same terms as those enjoyed by the multi-billion pound club.

Diversification

As well as institutional-style access, it also enables small schemes to diversify across a wide range of strategies in a cost effective manner.

This means they can tailor their exposure to different asset classes to ensure they have a variety of risk reward profiles across their investment choices.

That expansion of the tool kit available to small schemes is perhaps the most important factor in all of this – there really is no reason why, by using fiduciary management and other approaches such as LDI, schemes cannot hold their own in terms of investment performance.

Ajeet Manjrekar

Ajeet is co-head of River and Mercantile Solutions (formerly P-Solve) and has responsibility for the quality and evolution of client-driven services. He focuses on working with trustees to understand their specific investment and governance needs in order to design innovative solutions to achieve their funding objectives.

As a qualified actuary with extensive experience in both investment consulting and asset management, Ajeet re-joined R&M Solutions in 2016 after a few years in Deutsche Bank’s asset management businesses. Prior to that, he was a lead investment consultant advising several of our defined benefit and defined contribution clients.

Ajeet has a degree in Mathematics from Warwick University.

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