Three complex investment issues demystified

How to assess good value in a defined contribution default strategy was the topic of choice for Richard Butcher, managing director of professional trustee company PTL and chair of the PLSA DC Council.

Provide what it says on the tin

Butcher asked the audience to put themselves in a typical member’s situation. “You know nothing about investment. But you do know about descriptions. You live your life by descriptions,” he said.

For example, Butcher said, in your job, you work to a job description – when you buy a tin of paint, you choose it according to the way the colour is described.

How do you assess value? You do it by providing what it says on the tin

Richard Butcher, PTL

“How do you assess value? You do it by providing what it says on the tin,” explained Butcher. Therefore, trustee boards should evaluate the success of an investment return by measuring it against the expectations they have given scheme members.

Sorca Kelly-Scholte, managing director and head of EMEA pension solutions and advisory at JPMorgan Asset Management, said members value communication that goes beyond a straightforward description.

“It’s about how well you feel you have been guided, if you’ve had good support and communication, if it’s been well administered. You have to look at all those intangibles as well as the end pot,” she said.

Julian Samways, managing director of PR firm JPES Partners, said: “The way to get people saving is to help them understand every step of the way.”

Two-way communication

Next, Kelly-Scholte demystified buy-and-maintain credit portfolios.

“On the face of it, it’s simple: I would like you to build a portfolio which helps me to manage cash flow,” she said.

However, a simple idea can become complex very quickly, as variables are introduced such as credit risk, how precisely trustees want to match cash flow, and degrees of cushioning.

Not all of these variables are necessary. Considering cash flows are typically uncertain, it does not make sense to over-engineer them, said Kelly-Scholte. Schemes will need to change their requirements as their needs change.

“Some of this frustration around complexity is when you have it and it doesn’t address any need you have. That’s when it becomes irritating and frustrating,” she observed.

That said, schemes should be prepared to embrace some complexity because defined benefit investing is itself complex, she said. “We need to throw a bit more kit at it.”

The key to a successful buy and maintain credit portfolio is flexibility and continuous communication between an asset manager and a trustee board. Both parties should be prepared to adapt their approach if markets or the goals of the scheme change.

An effective strategy will also be so clearly articulated that a manager should be able to explain it in a one-page report. “A report you can fold up and put in your shirt pocket should give you all the information you need,” said Kelly-Scholte.

Putting geopolitical risk in context

Julian Samways’ topic of choice was how trustee boards should discuss geopolitical risk in a focused manner.

It would be very easy for trustee boards to spend valuable meeting time pondering fascinating subjects like the impact of Brexit, but it’s more important to put geopolitical issues in a practical context, he said.

“Talk about something meaningful for a pension scheme and couch it in terms everyone will understand,” he advised.

Instead of dwelling on Brexit, Samways explained, trustee boards could talk about what low and falling interest rates will mean for a company’s balance sheet. This issue is much more directly relevant to scheme sponsors.

To frame geopolitical risk in a way members will understand, it’s important to relate it to something tangible, he said.

“You could explain interest rates in the context of what that means for an annuity purchase and how it will affect future income for savers,” suggested Samways.