In this blog, Claire Jones explains DB investment platforms, and who could benefit by switching to them.
Nearly every pension scheme trustee I speak to includes governance in their top 3 challenges to making changes to their investment portfolio. The paperwork behind moving assets from A to B or introducing a new manager can be unduly onerous and can be the source of wasted effort and time. In my view, in this day and age, when so much is available ‘on-demand’, it is hard to believe that investment changes can sometimes take months.
It was trying to overcome this common challenge which drove our thinking about a different way to manage the changes involved in investment portfolios.
DC pension schemes have been using platforms for years, allowing individual members to access a better range of funds and more sophisticated investment strategies. Fiduciary managers also use platforms to implement changes quickly, although there are inherent conflicts with placing much of the control for investment strategy and manager selection with fiduciary manager.
Taking inspiration from the attractive features of these platform examples, we have started introducing some of our clients to a new innovation – a DB investment platform. This is similar to the platforms used by DC schemes and provides DB schemes access to a wide range of funds, including liability-driven investment (LDI) funds and those which only deal on a weekly or even monthly basis.
The broad idea is that pension schemes access their existing investments through a single contract with the platform provider (rather than separate contracts with the manager of each investment fund). What makes this different to fiduciary management is that the trustees are still responsible for deciding on the investment strategy and for choosing which funds to invest in. They can continue to invest in exactly the same funds as they do currently.
Then, when trustees want to move money between funds, they complete a simple dealing form and the platform provider does the rest.
What types of DB pension schemes can benefit from investment platforms?
Switching to investment platforms means you could benefit from speedier implementation of investment decisions, easier rebalancing of your portfolio and a more streamlined approach for asset transfers. But platforms are not suitable for every scheme. In our view they can be a good solution for small and medium-sized DB schemes that want to reduce time (and money) spent on implementing investment changes.
Schemes that use passively managed funds may see fee savings from day one – platforms often secure lower fees due to the benefits of bulk purchasing power.
If you use LDI funds you will find life much easier using a platform. When cash is needed to top up LDI fund exposure (eg if interest rates rise), platforms can do this automatically. There’s no need to permanently hold cash “just in case”. Rather you can hold investments with better expected returns (like DGFs or absolute return bonds) without the worry that you can’t find people to sign forms quickly enough to release cash.
Generally any schemes wanting to reduce governance when making changes to their investments, be it selling assets for cash outgoings, rebalancing once or twice a year or appointing a new manager, will find that platforms offer less hassle, less paperwork and quicker implementation.
If your pension scheme fits this profile, investment platforms may be well worth considering.
See how one of our clients made the switch to a DB investment platform with this case study.