“It’s not clear yet whether the cost of a third party brought in to minimise costs and risks during transitions would be included in the total cost under the charge cap,” according to Graham Dixon, director of transitions at Inalytics. “Whenever we have seen transition managers in DC, their charge has been paid for by investors as a one-off hit on the performance of assets. This option makes transition managers’ involvement in the DC space appealing for both schemes and TM providers.”
This could be a definitive factor in whether the use of specialist transition managers ever becomes more widespread in DC. So far, from the providers’ perspective, the asset volumes associated with DC has made it largely unattractive.
According to James Mitchell, executive director in Goldman Sachs’ transition management group: “To be optimal, a transition needs to be of a certain volume to both achieve and evidence the efficiencies provided by a specialist transition manager. Volumes in DC are still small enough that involving a TM is unlikely to be value-additive. As assets grow though, we expect to quickly see much more activity in this space, albeit with some innovation in terms of how the offering is priced and structured.”
The necessity conundrum
Given the greater administrative burden associated with DC transitions, transition managers would need to commit more resources and, in turn, charge higher project fees. AUM growth will need to be significant in order to minimise the impact on members of those fees and allow for transition management to become more common.
“With DB it is ‘accepted’ as a one-off hit, but that is more challenging under DC,” Mattingly suggests. But herein lies the conundrum. The greater complexity and visibility of DC structures adds weight to the case for using specialist transition managers during a period where scheme members are particularly vulnerable to risk and error.
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