Financial service firms and pension schemes face complex challenges today. Asset managers and insurers grapple with increased cost and competition while multi-nationals face jurisdictional complexity. And life is tougher for institutional investors which face similar issues but with fewer resources and a constrained governance budget.
The challenge of pooling
Operational complexity can be significantly reduced for both financial service firms and pension schemes by pooling.
By amalgamating assets, pension schemes can hand over the management of operational aspects such as trading errors and fee negotiation to another entity. This allows them to focus their resources on core issues such as the investment strategy and investor communications.
But co-mingling can be far from straightforward. Asset managers may be reluctant to pool because they feel it could stymie product innovation and stifle communication with their clients.
This can be a similar concern for insurance companies, whose legacy systems and multiple products also create complexity. And multi-nationals want efficiencies of scale but need to maintain specific domestic pension scheme requirements.
Pooling assets is complex for DB schemes because sponsoring companies are reluctant to relinquish control while still being on the hook for contribution payments. Fiduciary management is proving the most popular option for these pension schemes.
For many UK DC schemes, asset pooling has not yet become a significant issue because auto-enrolment is still nascent. Some countries, however, have moved closer towards the benefits of improving scale and transparency. For example in Australia members rather than companies choose which schemes they want. This introduced competition and drove the need for better cost and efficiency so schemes could compete more effectively for market share.
The ‘modern utility’ in financial services
There is a way to pool assets which enables asset managers, multi-nationals and pension scheme to sidestep some of the challenges – through using an institutional platform.
Just as technology firms such as Amazon and Uber have changed the way people shop and hire cars, a similar revolution is underway in the investment world.
There are a number of options available. Investors should select a platform which best matches their needs, not only today but also in the future. Trustees should think about ways pensions will change in the future, such as through the impact of regulation, and ensure their platform could adapt to these changes.
By streamlining the processes involved in pooling assets through technology, asset managers and institutional investors can work efficiently on one platform and make operational tasks, such as treasury and liquidity management, are as effective as possible.
“Investors are increasingly looking to the Asset & Wealth Management (AWM) industry to provide value for money. Technology can be used to create efficiencies, cut costs and drive change.
This transformation will require technology and teams to work together in a fundamentally new relationship, one in which automation replaces routine manual tasks but also assists teams in better executing their roles and creating new opportunities for institutions and their employees. ”
Andrew O’Callaghan, PWC
In addition, these processes can be achieved through an institutional platform which builds funds from the roots up, facilitates the relationship between the asset manager and the pension scheme as well as negotiating lower fees.
Controlling the fund structure enables platform providers to offer institution-only funds. At same time governance can be improved by managing risks such as trade errors and making funds tax efficient by ensuring the right fund structure is in place.
This ‘modern utility’ allows both financial service firms and institutional investors to pool their assets while avoiding the issues provoked by more traditional methods.
Meeting client needs
Asset managers maintain their relationship with their end client. A full ‘look through’ to fund flow data helps them to keep that relationship and monitor when clients add or remove assets.
Platforms can overcome the challenges Solvency II creates for insurers, providing the granular data needed to meet additional reporting requirements while enabling them to rationalise complex legacy systems with multiple funds.
Multi-nationals offering pension schemes in multiple jurisdictions can pool their assets using one fund and fee structure, reducing cost and complexity and improving governance. Nor will this impinge on their ability to comply with individual pension regulations.
A platform can work with fiduciary managers to provide the funds which are then combined in individual scheme investment strategies. This way the schemes can gain the benefits of pooling while still retaining control.
For DC schemes, the modern utility offers a way for both master trusts and company schemes to reduce fees while maintaining high governance levels. Funds can be consolidated so the number of funds can be reduced, offering further efficiencies.
When working at its best, a platform is a connector – a central part of the market that brings everyone together in the most efficient way, learns from how market participants use it and evolves accordingly.
For more platform insights download our “A new platform paradigm” report.
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