Visibility means risk
Even with the most meticulous preparation, the risks associated with transitioning in DC are arguably greater than for DB, not least because of the complexity of unitised prices, but also because of the greater visibility to members of any errors or unmanaged risks. “In most cases, any risk or loss resulting from a transition instantly impacts the accounts being viewed by members,” explains Roger Mattingly, director of PAN Trustees and outgoing president of the Society of Pension Consultants.
Where the assets change a lot, out-of-market risk and transaction costs are inevitable without some management.
It is possible to mitigate out-of-market risk in DC transitions with the provision of prefunding, whereby a platform provider or investment manager effectively lends the target manager money to buy the new assets at the same time as the old assets are sold, but before the cash from the sale has settled. This depends on having a platform provider that is willing and able to provide up-front funding to the level required, something that may change as DC schemes grow and the size of any individual exposure increases.
Transaction costs can be managed where re- registration or in-specie transfer is accepted, but this is generally only for simple transitions and where the shape of the assets doesn’t change much. Even then the final costs may not be known until the transition is complete and they are factored into the unitised price.
“Where there is significant re-shaping, transaction costs, which include execution costs and variations in asset prices during the transition period, are harder to avoid,” Aspinall says.
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