Increasing Demands and Significant Risks: The Growing World of Asset Transition

What Is Asset Transition And Why Is It In Demand?

Asset Transitions occur when a client wishes to replace an investment manager or change the investment strategy of a pension scheme. This can be an incredibly complex and difficult process requiring an art as well as a technical skill, and the potential risks involved are significant. As the Defined Benefit market shrinks and the Defined Contribution market continues to mature, Asset Transition is likely to become an increasingly high profile and competitive area, with highly sought after experts and reputations that are key to winning new business.

Historically, Asset Transition was the domain of the fund management groups, but the market is seeing a rising number of insurance companies and platform providers who are entering this space as transitions become more mainstream and demand increases. Companies with a proven track record of success and known capability within Asset Transition are finding that it can make the difference in winning a new scheme. However, Asset Transition is not an easy thing to do, and as new businesses enter the market it may be that they do not appreciate the work and intricacies required to be successful. In the DC world, the complexity arises from the fact that the assets are attached to each member based on their individual investment choices, and it is key to preserve the value of these assets whilst minimising out of market exposure. The process can be very complex, firstly because of issues arising from transitioning the funds themselves and secondly as assets need to be attributed accurately back to the members. This is an involved process that can take many weeks to plan and execute successfully, and every case is different.

Asset Transition expertise is becoming more in demand as competition increases, platforms proliferate, and the DC market matures. The more traditional method of liquidating assets to then reinvest can often reduce the value by around 1%, a significant implication for investors nearing retirement and a driver for Asset Transition, which can be more efficient. Regulation is driving platforms to provide reregistration of assets for individuals, and Asset Transition is the answer to this in the Corporate Pensions arena. Transitions have always happened within DB, but DC is more complicated and calls for different skills. DC Asset transition demands a lot of technical skill and knowledge, but there is also a definite art to it, and there are more techniques now than there have been previously. Transitions in the DC space are more visible to members, thus attracting more attention, and also assets to be transitioned tend to be larger in DC. This profile of skills is much sought after and not easy to find. Because of all this, it is becoming increasingly popular to promote from within and for companies to ‘grow their own’ expertise in house. The advantage here is that these individuals will be familiar with the company’s set up and internal systems and their capability is a known quantity.

The pace of change is also driving the demand for DC Asset Transition skills. Employers and trustees are reviewing their schemes, going to more platforms and diversifying their assets. There is an increased demand for flexibility, for blended funds that allow more choice and modification. The market is seeing a lot of market and proposition developments that continue to drive dynamism and competition. This, coupled with a greater awareness of the need and ability to minimise out of market risk and transaction cost through carefully managing transitions, is driving the demand for this rare skill set.

The Pitfalls Of Getting It Wrong
Getting the process wrong can be a very expensive mistake to make. DC Asset Transition is highly visible to members, and in an extremely competitive marketplace you can be sure that competitors and customers are watching closely for mistakes. There’s a significant reputational risk involved here, as well as the responsibility to the interests of members. Volatile markets only further emphasise the need to manage out of market risk and minimise the cost of transactions. There are also risks in the need to work with other parties as schemes transition. Those working inside fund managers and platform providers work with Third Party Administrators and Consultants, handling sometimes very high profile cases. If the work isn’t accurate on both sides then there is a huge cost implication, a significant amount of work involved to correct the mistake, as well as the risk to your reputation. If neither party accepts the mistake or moves to rectify the errors, then potentially the value of members’ investments could be negatively impacted. Given that the provision of bad or inaccurate advice has recently been a big media story, and the increased public concerns over pensions, perhaps it will be mistakes in transitioning our pension schemes that provide the next public scandal for Financial Services.

One thing is sure, as the DC world continues to grow and Asset Transition becomes increasingly sophisticated and well-known then there will be a growing number of watchful eyeballs scrutinising every move of their vital pensions as the media and regulators sharpen their claws for those who make mistakes.

Giles Lewis, June 2011
With thanks to those who kindly contributed their time and thinking to help me put this piece together.