What advisers can do to monitor scheme investments

Graham Peacock, managing director at Salvus Master Trust, says he is already seeing employers move from one provider to another because something did not go to plan or expectation.

He notes: “Advisers have a role in first selecting and then reviewing how well the workplace pension has performed.”

Those financial advisers tasked with scrutinising how and where the scheme is invested will need to know what they’re looking out for and understand when a scheme’s investments might warrant transferring to a new scheme.

Performance snapshot

Mark Fawcett, chief investment officer at NEST, the government’s workplace pension offering, says the starting point for advisers is to understand what the scheme’s investment objectives are.

He says this means asking: “What are they trying to achieve? How likely do they think it is they’ll achieve that in a variety of scenarios? How does their approach perform in times of stress and how do they say they’ll go about it? 

“This should all be written down in a clear way so that third parties can assess the scheme’s suitability for a particular set of workers.”

While risk drives return, excess volatility can be inefficient. If pots experience big falls they have to work that much harder to make up the gains.Mark Fawcett

He goes on: “The next step is to then interrogate how far the scheme is meeting its stated objectives and carrying out the processes it has said it will undertake. 

“Is it diversifying portfolios? Is it managing downside risk? Is it managing a wide variety of risks including environmental, social and governance risks effectively?”

Mr Fawcett points out while performance expressed as a return figure is important when assessing a scheme’s investments, this represents “only one snapshot in time”.

He explains: “What’s going to be more important to overall member outcomes is the long-term trend.”

Volatility can have a significant impact on employees’ pension pots so any signs of excessive volatility may be cause for concern.

“While risk drives return, excess volatility can be inefficient. If pots experience big falls they have to work that much harder to make up the gains,” he adds.

Lydia Fearn, head of defined contribution at Redington, suggests conducting an annual review of scheme investments and potentially more if the market environments becomes volatile.

Asset allocation decisions

What type of investments are suitable for a workplace scheme which caters for employees of all ages and with different pension needs?

In a report published by Defaqto, How to analyse auto enrolment default funds, it finds NEST spreads its investments across a greater range of managers than the other default funds. 

Figure 1: NEST 2040 Retirement Date Fund asset allocation at end of June 2016

Source: Defaqto, How to analyse auto enrolment default funds

The report states: “Their fund manager turnover has been low and Nest will tolerate short-term underperformance as long as the manager keeps to their stated process and style. 

“The disadvantage of using third-party managers is that this method is generally more expensive than managing in-house, although Nest states that it is able to negotiate favourable terms as a result of its fund size and expected future contributions.”

Some providers will be able to keep costs down by allocating to passive investments in a default scheme, while other schemes will invest via a combination of passive and active exposures.

Following the pension freedoms which did exactly what they suggest and freed those at retirement from having to buy an annuity, multi-asset funds have been a particularly popular choice for retirement portfolios.

Should a pension designed to invest for a company’s workforce invest across a range of asset classes?

According to Nick Dixon, investment director at Aegon: “Advisers should consider default funds with a few basic ingredients: equity bias in the asset allocation, global diversification, long-term growth above inflation, value for money, aligned with an automated strategy which prepares investors for retirement where, in light of new pension freedoms, a cautious multi-asset ‘end point’ may be more appropriate than traditional gilts and cash.

“Governance reviews should, of course, assess the scheme members first – changes in age distribution, typical savings rates, and retirement patterns – before a review of the fund’s performance and asset allocation.”

Uncovering data

Digging into a scheme’s performance does depend on having access to data, something that is not readily available on all default schemes, Mr Peacock points out.

When selecting a workplace pension, advisers and the companies they are choosing a scheme for may want to ensure they are able to get hold of detailed performance data from the provider.

“When choosing a workplace pension provider it is important to have the skills to evaluate a default: Active versus passive, asset allocation, lifestyle versus target date, de-risking models, position at retirement and, of course, performance,” he says.

“There is no simple way to compare defaults and from best to worst in the last 12 months there is a wide variance.”

It’s a case of reviewing the investments as you would do for any other client with the only difference is that there is no ‘one client’ but an average scheme member.Scott Gallacher

Chartered financial planner at Rowley Turton, Scott Gallacher, explains the service he providers to monitor workplace pension scheme investments.

“We offer corporate clients an annual traffic light ‘Monitoring Your Pension Scheme’ service and as part of this we cover performance of the default fund and other investment choices,” he says. 

“It’s a case of reviewing the investments as you would do for any other client with the only difference is that there is no ‘one client’ but an average scheme member.”

Naturally, a younger employee will have entirely different pension investment targets compared to an older employee for whom retirement is less than 10 years away.

Figure 2: The glide path of the default fund strategy

Source: Defaqto, How to analyse auto enrolment default funds

Workplace schemes should take all of this into account and reflect the changing needs of its members in its investments.

Mr Fawcett poses a series of questions which might help an adviser determine how to monitor scheme investments.

• Is the way the scheme procures fund managers competitive? 
• Does the scheme use a variety of fund managers, picking the best value for different asset classes, or are they required to just use one investment manager? 
• Are the people selecting fund managers experts or are they reliant on external advice?

It is more than likely many workplace pension schemes will have their own committee of people responsible for overseeing investment decisions but the adviser should be another layer of that ongoing monitoring.

As Ms Fearn notes: "The investment environment has and will change over time, product and funds come and go, so it is important for advisers to keep an eye on what their clients have, what is new to the market and if improvements or changes need to be made.

"Regular monitoring of the scheme investments will help determine whether scheme members are on track for a reasonable outcome or if they have come off target.

"If necessary, changes can be made but those changes need to be considered in light of any potential transaction charges and ongoing charges to make sure the member will likely be better off in the long run."

eleanor.duncan@ft.com