Trustees need to consider the implications of conditions in world stock markets for smaller defined benefit schemes and the in particular the challenges they face.
Trustees have twin objectives of maximising investment returns within their mandate whilst controlling investment costs. The advantage of having access to fund managers across the market is understood. However historically, only trustees of large schemes with the financial resources and economies of scale could access institutional investment markets.
Key risks for trustees of small schemes There are specific issues which confront sponsors and trustees in determining their investment strategy: Size – Because institutional markets have high barriers of entry, smaller corporate trustee investments are precluded. This means trustees have had to compromise over fund managers and asset allocation decisions.
Costs – An active management strategy incurs disproportionately high costs when a change in manager or asset class is implemented. Stamp duty, dilution levy and stock broker fees, all mitigate against the trustees desire to maximise investment returns. Market movements – Where a decision is made to switch managers and sell assets, settlement periods may leave the trustees effectively disinvested for several days. If markets move significantly, for example autumn 2008, this could be detrimental to the scheme by creating adverse buying conditions.
A valuable solution
There is an innovative and practical solution for smaller schemes. The Corporate Trustee Investment Plan (CTIP) is a simple concept, tried and tested. The AXA CTIP uses an investment platform which gives trustees access to best in class fund management groups across a broad spectrum of asset classes. Trustees decide on a blend of assets with different fund managers, on competitive terms.
Trustees have regulatory fiduciary responsibilities to manage investment risks and CTIP, coupled to a multimanager investment platform ticks all the key boxes.
Key advantages of multi-manager platforms include:
• Trustees are able to spread risks between leading fund managers and actively monitor and manage their strategy.
• By pooling assets across a large portfolio of schemes, the platform provider can negotiate charges and fees, which normally could only be achieved by institutional investors.
• Legal contracts are executed between the platform provider and individual fund management groups. The trustees enter a single investment contract with the host platform provider.
• Switching investments is simple and efficient with minimal paperwork. A seamless process ensures the trustees are always fully invested in their chosen assets.
• All the assets of the scheme can be held under a single investment wrapper.
• The sponsor and trustees have a single point of contact for all decisions and queries.
• Fund portfolios are tailored to suit the needs of each scheme.
• Funds are typically priced daily. This allows regular cash in-flows such as contribution income to be invested promptly and investments to be sold quickly to meet claim payments.
• State of the art IT systems ensure automated processes can perform millions of calculations, securely, accurately and promptly every business day.
• Assets can be rebalanced more efficiently through contribution flow or on an agreed fixed basis, reducing friction costs.
Finally, the Statement of Investment Principles typically requires investment classes to be periodically rebalanced. The multi-manager system under CTIP automatically rebalances over any period specified by the trustees. Alternatively, funds values can be rebalanced by redirecting new money or disinvesting claim payments from specific funds.