DHL transition exercise delivers savings for members

Many DC schemes have been making changes to adapt to the introduction of freedom and choice, but the expense of transitioning investments can be significant, as cost management remains a key concern for trustees.

I think it’s important, particularly with big transitions, that you’re not undertaking unnecessary trading

Jignesh Sheth, JLT Employee Benefits

An update to members states that the DHL scheme has “finished putting some new DC section investment options in place – a default lifestyle strategy and a choice of three other lifestyle strategies”.

All four lifestyle strategies also have the choice of two routes that determine the mix of investment funds in the decade leading up to retirement.

The investment transition took place during the final quarter of 2015, “and was an extremely successful exercise”, reads the newsletter.

“By trading investments between members (known as ‘crossing’) at no cost, we were able to save members over £2.3m in charges,” it states.

The practice is not unusual

Alex Pocock, partner and head of DC investment at Barnett Waddingham, said that crossing “is a very common way of looking to save money when you’re undertaking investment transactions”.

It could be that a scheme has some members that are selling equities, for example, and some members that are buying equities, he said.

Rather than going into the market and transacting those equities, he said just passing them from one member to another is avoiding market trading costs.

Crossing at different levels

There are several different levels at which this aggregation can be done.

“You can either do it at scheme level, or, depending on who your investment platform provider is, you might find that they then aggregate transactions through to underlying third-party managers,” Pocock said.

Source: JLT Employee Benefits (250 Club Report 'Freedom and Choice', August 2015)

The people that run the individual funds will also aggregate all the transactions they see on one day and make sure the cost is shared across everyone, he added.

Pocock also said that, for schemes planning to make this kind of transaction, “one aim is to keep costs to a minimum, but there are other things that are more important, like maintaining the right exposures throughout”.

Out-of-market cost

Jignesh Sheth, investment consulting director at JLT Employee Benefits, said: “It’s important, particularly with big transitions, that you’re not undertaking unnecessary trading.”

However, depending on how the transition is carried out, a potentially much bigger cost is ‘out-of-market cost’, said Sheth.

For example, he said, when moving from one equity fund to another, if the money is in cash for a few days then what happens to markets in between is going to have a much bigger impact on transaction costs.

Value for money wrapped up for trustees

Sheth noted that a pension scheme would notify its members with regard to how much they saved through crossing, not so much because the process is unusual, but because it is helpful for members to know that money has been saved as part of a big reorganisation.

With regard to value for money when transitioning, he said: “Trustees need to be confident that there is a legitimate reason [so that] there’s some value to be had.” He said that might relate to having a better strategy, or being with a better fund manager, for example.

Paul Macro, director of pensions consultancy Isinglass Consulting, said crossing is “not difficult to do… it’s simply an administration matter – what units do we have and what do we need”.

He added, however, that it is not always done, as “the costs of buying and selling units is often just lost in the process with the excuse that they are single priced units – which is of course totally misleading”.

He said a number of admin systems do this each month as part of the allocation of monthly contributions, particularly where there is lifestyle switching taking place.