Industry must help small schemes keep up with standards push

It is undeniable that trustees, whatever the scheme size, commit their own time and dedicate themselves to doing what they think is in the best interests of their members.

The challenge today is that there are far more things to consider – more complex benefits, more asset classes, and more explicit governance standards. There is also far more choice in the market than there once was.

While those currently using pooled LDI have done what they think is best, there are simply better alternatives now, used as standard by their larger counterparts

There is no doubt that small schemes could do more for their members. One way of identifying these shortfalls is to consider what larger schemes are doing.

This spans numerous aspects of trustees’ work, but in many cases it boils down to time – large schemes have more resources and more time to be able to deal with more complex governance issues and, in extremis, internal investment management.

No excuse for small scheme lag

However, this is where advisers and providers, including asset managers, should assume more responsibility and take on the work that trustees do not have the time to do.

To illustrate the point with an investment example, there are some key features of larger schemes that small schemes may not use or have. Three in particular stand out:

• Near universal adoption of liability-driven investment;

• Broader derivatives usage using segregated mandates; and

• Wider range of asset classes used.

The perception is that all of these things are not accessible to small schemes. I disagree.

LDI is a good example. A common view across the industry, prevalent amongst consultants and trustees, is that LDI is only available to small schemes through pooled funds.

Indeed, we recently hosted a summit for small schemes and about half the audience said they either had pooled LDI or had considered it.

Segregated is superior

It is widely acknowledged that large schemes use segregated mandates, not pooled LDI.

All other users of derivatives use segregated mandates. Put simply, it is the most efficient way to implement derivatives and provides the widest range of tools and flexibility.

This is why large schemes use them. The efficiency means schemes can target more LDI whilst maintaining more on-risk assets.

The range of tools enables schemes to protect against equity market falls if they choose.

Goldman Sachs research has recently pointed out that smaller schemes have underperformed potentially as a result of larger schemes implementing better risk management strategies. If this is true then small schemes are clearly missing out.

Time is critical

The central reason behind this goes back to trustees’ lack of time. There is a perception that segregated mandates are onerous to set up – a hassle that time-poor small schemes could do without.

While this was true 10 years ago, it is not anymore – segregated mandates can now be as straightforward as a pooled fund for many small schemes.

While those currently using pooled LDI have done what they think is best, there are simply better alternatives now, used as standard by their larger counterparts.

Take weight off trustees

The same is doubtless true in other areas. If trustees of smaller schemes were made aware of something better that they could govern, I have no doubt they would do it.

But trustees do not have time to perform the research. As a result, the responsibility lies heavily with consultants and providers to make things more accessible to schemes of all sizes so that trustees understand all their options.

The challenge for consultants and providers is how to do that in a way that works commercially.

Mark Davies is a managing director at River and Mercantile Derivatives