Future thoughts for smaller funds
11 June 2013
There was an interesting survey reported in the last edition of SLT. I know, I know; ‘interesting’ and ‘survey’ don’t belong in the same sentence
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There was an interesting survey reported in the last edition of SLT. I know, I know; ‘interesting’ and ‘survey’ don’t belong in the same sentence—how many times have you turned on the news to be told an interesting survey has been published that reveals something banal and that your granny has always told you anyway? No, this one actually sounded interesting and although I haven’t seen the detailed results, even just the two headline conclusions reported by SLT deserve a pause for thought.
The first was that 81 percent of defined benefit and defined contribution pension funds expect investment decisions to become more complex in the next 12 months because of the funding challenges they face and the changing regulatory landscape. The second was that 76 percent of smaller pension funds expect to outsource all aspects of fund management in the next five years.
I don’t suppose that more complex investment strategy will come as a shock to many, but seeing it in black and white provides the opportunity to think about the knock on affect this may have. Historically, securities lending has struggled to get priority billing with pension fund trustees, as they always have more important things to focus on—despite what we in the industry may think, we are not the most important consideration! With the regulatory uncertainty and changes affecting all aspects of a pension fund (not just the securities lending activity), it may be easier for them to suspend discretionary activities such as lending and give the complex issues, such as investment strategy in the current changeable environment, the focus that they will require.
To avoid this happening, agents need to understand the broader implications of regulation and ensure that, as far as possible, they offer straightforward answers and solutions to the pension funds within the broader context of fund strategies. Understanding the bigger picture and providing good information with easy access to data will be key.
The second survey fact—that 76 percent of smaller funds will outsource all aspects of fund management in the next five years—also has potential implications. Adding more relationships to an already complex structure will complicate the requirement for controls and strong processes to manage asset flows, and client requirements. There will also be additional relationships to manage and a more complex reporting matrix. Although agents may already have the infrastructure in place to manage these multi-dimensional relationships, they will still need to consider the cost base of managing more clients in this way, and ensure that they have optimal automation. Equally, to ensure the right selection is made, pension funds will need to know what that want and what to ask about. Early planning and preparation on both sides will be vital.
The first was that 81 percent of defined benefit and defined contribution pension funds expect investment decisions to become more complex in the next 12 months because of the funding challenges they face and the changing regulatory landscape. The second was that 76 percent of smaller pension funds expect to outsource all aspects of fund management in the next five years.
I don’t suppose that more complex investment strategy will come as a shock to many, but seeing it in black and white provides the opportunity to think about the knock on affect this may have. Historically, securities lending has struggled to get priority billing with pension fund trustees, as they always have more important things to focus on—despite what we in the industry may think, we are not the most important consideration! With the regulatory uncertainty and changes affecting all aspects of a pension fund (not just the securities lending activity), it may be easier for them to suspend discretionary activities such as lending and give the complex issues, such as investment strategy in the current changeable environment, the focus that they will require.
To avoid this happening, agents need to understand the broader implications of regulation and ensure that, as far as possible, they offer straightforward answers and solutions to the pension funds within the broader context of fund strategies. Understanding the bigger picture and providing good information with easy access to data will be key.
The second survey fact—that 76 percent of smaller funds will outsource all aspects of fund management in the next five years—also has potential implications. Adding more relationships to an already complex structure will complicate the requirement for controls and strong processes to manage asset flows, and client requirements. There will also be additional relationships to manage and a more complex reporting matrix. Although agents may already have the infrastructure in place to manage these multi-dimensional relationships, they will still need to consider the cost base of managing more clients in this way, and ensure that they have optimal automation. Equally, to ensure the right selection is made, pension funds will need to know what that want and what to ask about. Early planning and preparation on both sides will be vital.
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