Where are the specialists?
So far managing the operational, administrative and investment risks associated with transitions in DC has fallen mainly to consultants and fund platforms. The skill required for the task is not, however, core to their offering. Furthermore, given the lack of frequency of transitions, the arguments for consultants or platforms to build specialist in-house teams is more limited.
The question, then, is whether factors like out-of-market risk and transaction costs are captured and minimised in the most effective way possible. In many cases, the answer is likely to be no.
“No consultant or platform can do what a specialist transition manager can do,” JLT’s Finch states.
In the world of DB, schemes commonly use specialist transition managers in order to minimise those risks, but, so far, this service has been largely absent from the DC space. The reasons for this are manifold, but relate largely to risk and cost.
Much like other agency services, few transition managers want to take on the risk of providing unitised pricing, a factor believed to deter many from offering their services to DC schemes.
From the scheme perspective, paying for another agency service in addition to a platform provider and/or consultant is also difficult within already constrained budgets.
“There is a point of tension between the greater level of specialism and expertise needed for transitions in DC and the amount of money available to pay for those services,” Mattingly argues. “The cost of full advice can be prohibitive, especially given the 0.5% annual management charge that is widely regarded as the ‘going rate’ in respect of DC arrangements used for auto-enrolment compliance. This is something that has to be resolved.”
At the time of writing it was also uncertain whether transition management fees would be impacted by the charge cap of 0.75% a year proposed by pensions minister Steve Webb scheduled to be introduced in April 2015.
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