RisCura: Expert Opinions: Edition July / September 2019




David Potgieter, Head of Operations, RisCura

Smaller pension funds are finding it difficult to comply with ever stricter

regulatory and governance requirements, particularly since the ‘default’

regulations came into effect in September 2017.

As a result of this and other factors, many trustees are considering

shutting down their standalone funds and moving their members into

pooled solutions like umbrella funds. While this is certainly one option,

it might not be suited to every fund nor to specific needs of members.

Trustees of standalone funds can determine their own benefit

regime and investment strategy, tailored specifically to their members’

needs. In a large pooled structure with a wide cross-section of members,

members tend to get exposure to a more generic, off-the-shelf offering.

It may look cheaper in the short-term, however, what is the cost to

members in the long-term? Will they end up with the pensions they

need for a decent lifestyle later in life?

Additionally trustees of smaller, standalone funds generally feel

more responsible towards members as often they know many of them

personally, and are frequently, members themselves. This makes it

easier to fulfil the fiduciary goal of looking after the fund “as if it were

your own”.

So, are there other ways a standalone fund not wanting to join

an umbrella scheme can retain its independence while reducing

compliance complications, governance burden, and costs?

Delegated Investment services

One way is through a delegated investment solution, which allows

funds to remain standalone and retain the benefits that brings, whilst

reducing the burden of governance and compliance and lowering

costs to members.

In this solution, trustees retain full control of their fund’s strategic

direction, assisted by the delegated investment service provider, who

carries out member and fund risk profiling, asset-liability modelling,

and provides an Investment Policy Statement (IPS) and relevant trustee

training, as required.

The fund’s assets are invested into a managed portfolio of investment

manager funds, including cash and derivatives, as appropriate.

Trustees can also delegate the often difficult and time-consuming

task of choosing, managing and monitoring their asset managers.

In addition, tactical asset allocation decisions (within the bounds of the

strategically agreed IPS) could be made by the delegated investment

service provider on a discretionary basis and executed timeously to

optimise performance and manage risk more effectively. This ensures

that market valuation dislocations are responded to swiftly. Accounting

and other investment administrative functions are also handled by

the delegated investment services provider, ensuring full investment

regulatory compliance and satisfying audit requirements.

What about fees?

With delegated investment services, several economies of scale apply,

such as being able to negotiate better manager fees with investment

managers, common processes and controls across funds. This enables

the service provider to charge for services, inclusive of asset manager

fees, with a single flat fee, at a highly competitive rate, that ultimately

saves funds money.