DC Asset Transitions February 2017

Transcription

1 DC Asset Transitions February 2017

2 protect members pots when transferring assets? So you ve put lots of thought into your DC scheme provider, your available fund range and your default strategy, but have you fully considered the actual transition to any new arrangements? Asset transitions can have a tangible impact on members pension pots DC pension schemes are currently going through a period of significant change, largely brought on by the closure of defined benefit schemes, the arrival of auto-enrolment, new flexibilities at retirement and increased guidelines around governance, value for members and default strategies. Trustees and governance committees are, sensibly, looking at whether their investment arrangements are still appropriate and many are looking to implement new options and deciding to transition legacy assets to new providers/managers. As DC asset transitions are becoming increasingly more common, and the values involved are growing, they are coming under closer scrutiny from trustees, governance committees and employers. In addition to the fiduciary responsibility for trustees and governance committees to make sure that all transitions are carried out in members best interests, there are also formal criteria for non-consent bulk transfers from trust-based schemes. When this is a trust based scheme to trust based scheme transfer, these criteria currently include a requirement for actuarial certification that the transfer credits to be acquired for each member are, broadly, no less favourable than the rights to be transferred.. The challenge with DC is that costs and risks directly impact members through their pot sizes and, ultimately, their retirement income. Throwing this into the spotlight, many schemes now allow members to view their holdings on a daily basis, so drops in value over a transition period are more likely than ever to be queried. Providing transparency and reassurance to members is difficult, however, in an environment where market movements are constantly changing fund values, implicit costs are built into trade prices and potentially thousands of individual pots are involved. In the past, some asset transitions have been treated as an after-thought and entrusted solely to providers/managers, but we are now seeing trustees and governance committees asking for much more support in this area. Key risks in an asset transition Generally speaking, the key challenges in a transition project are as follows: minimising transaction costs as far as possible; reducing the operational risks present; We explore these further overleaf. minimising out of market exposure as far as possible; completing the transfer in a timely manner 2

3 protect members pots when transferring assets? (cont.) Transaction costs Although costs are not generally apparent to members (instead they are implicit in the prices that members pay/receive for their units), there is an increasing focus on costs within the industry. This is especially true where there is a requirement to show that members have not been disadvantaged by transfers. In some cases, this requirement has led to employers reimbursing transaction costs themselves. Sometimes it is possible to reduce the transition costs or for providers to compensate members for costs incurred. Part of the project management role is to understand the scale of any costs and mitigate these where possible. Operational risk A robust transition procedure must be followed in order to reduce the chance of operational errors, such as trades not going through as planned, cash not arriving on the correct day or members assets not being mapped across correctly. A key step of the procedure is for all actions and instructions to be agreed in advance by the relevant parties. It is also important for roles to be clearly defined so that, if errors do occur, it is clear which party is responsible. Operational errors are particularly damaging for DC transitions, as they affect individual member pots. If an error occurs across multiple member pots then it may be very time-consuming and costly to rectify. Out of market exposure Timing While assets are being transferred between funds, there might be extended periods of time where they are out of market, which is when members pots are effectively sitting in cash. The principal risk of out of market exposure is that, if markets take an up-turn, members forgo this return. Although, conversely, sitting in cash does mean that assets are protected from any falls in the market over the transition period, it is a deviation from members investment strategy which should be avoided where practical. The project manager should aim to match the timing of the disinvestment as closely as possible to the timing of the investment. It is often possible to reduce the out of market risk significantly by investing before cash is received from the disinvestment; however, this complicates the project and means that the importance of careful planning increases. There may also be a cost for temporarily borrowing cash from the manager/ provider to deal ahead of receiving the disinvestment proceeds. Decisions should be implemented within a reasonable timeframe to reduce potential opportunity costs of waiting and not investing in line with the agreed strategy. As with any complicated project, planning can be timeconsuming so strong project leadership is crucial. Consideration should be given to market conditions and avoiding times where volatility is expected to be high and/or liquidity is expected to be low being able to adapt to such issues is important. Consideration should also be given to the time required for member communications and whether a blackout period will apply (a period where members cannot make changes to their investment options that could disrupt the transition). 3

4 protect members pots when transferring assets? (cont.) Case studies We have set out below three recent examples which highlight the risks involved in project managing asset transitions. In addition to these examples, there have been many instances where we have identified issues with transition plans or highlighted gaps prior to trades taking place. Without proper project management and oversight, it is easy for transitions to run into difficulties and for potentially costly errors to be made. Client 1 For a transition between two providers, the incoming provider had agreed to manage the asset transition and KPMG had been appointed to provide oversight on behalf of the employer. The incoming provider said they would also cover the transaction cost up to a cap, but told the employer that final costs would almost certainly come well below this cap. On the strength of this, the employer gave reassurance to the trustees and members that the full transaction cost would be covered. The final cost was approx. 33,000 over the cap. We were able to show, however, that the provider s initial cost estimate had been based on overly simplistic assumptions and persuaded them to cover this additional cost. This spared the employer from paying the additional 33,000 themselves. Client 2 KPMG was appointed to oversee a restructure on a platform involving multiple funds across two managers. The employer agreed to reimburse members transaction costs, and the administrator confirmed they could calculate these based on prices given by the provider. KPMG was asked to carry out checks on the administrator s transaction cost calculations. Before the transition went ahead, we demonstrated that the cost calculation methodology the administrator was suggesting could not work and helped them to find a work-around. Following the trades, the administrator initially calculated a cost of approx. 27,000. After discussions with KPMG, it was agreed that this cost was too high. The employer ultimately paid costs of approx. 9,000, which represented an approx. 18,000 saving while still reimbursing members fairly. Client 3 KPMG was appointed to oversee a transition from a trust-based scheme with one provider to a Group Personal Pension scheme and a buy-out scheme with another provider. Although the incoming provider agreed to co-ordinate the asset transition, KPMG stepped in to keep the project moving and reduce risk. The outgoing provider said they would not liaise directly with the incoming provider without a formal instruction letter, but the incoming provider said they would not draft this. KPMG drafted the instruction, got it reviewed by the outgoing provider and clarified how it should be signed and returned. While waiting for the letter to be signed, KPMG facilitated the transition planning by obtaining information about the outgoing providers processes and sharing this with the incoming provider. One potential issue that KPMG identified when looking at the providers processes was that the timescale for transferring cash was very tight. The outgoing provider said redemption proceeds needed to be paid to the nominated trustee bank account and would not be paid until four days after the trade date (T+4). The deadline for cash to be received by the incoming provider was also T+4. This introduced additional risk, as the cash would need to be received into the trustee bank account and paid out to the new provider on one day. We asked the outgoing provider to send the cash early, on T+3, and to send it directly to the incoming provider. The outgoing provider ultimately agreed to this, reducing the risk of cash being received late and overdraft charges being incurred. 4

5 protect members pots when transferring assets? (cont.) Summary Effective transition planning is especially important for DC schemes because asset transfers directly affect members individual pot sizes and impact members eventual retirement incomes. There is a fiduciary and regulatory responsibility to demonstrate that DC asset transitions have been carried out appropriately. Transitions of assets from one arrangement to another are complex events, involving a number of different parties and numerous possible pitfalls. In our experience, if not well managed, a transition can prove to be costly both in terms of direct and indirect costs. KPMG DC Solutions We have four dedicated inhouse transitions specialists who advise on transitions for our UK-wide Investment Advisory team Our specialists have experience planning a wide range of asset transitions for both Defined Benefit and Defined Contribution schemes We have a detailed, robust transition process which aims to reduce risk and improve outcomes for clients During the past two years, we have advised on over 600 transitions, involving assets to the value of approximately 12bn. The largest of these was a DC transition involving 2.5bn of assets spread across 100,000 members 5

6 Contacts Rosy Lowe Manager Investment Advisory Asset Transitions Tel: +44 (0) Mark Powley Senior Manager Investment Advisory Tel: +44 (0) Mob:+44 (0) Anne Swift Director Head of DC Investment Tel: +44 (0) Mob:+44 (0)

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