The butterfly effect: unearthing the intricate world of DC transitions

5 Jun 2014

Transitioning assets in defined contribution (DC) pension structures is an especially complex task. Yet, to date, transition management is a relatively unexplored area for both schemes and their providers. The challenges thrown up by unitisation and greater visibility require meticulous management, but few schemes currently give due consideration to the ability of their existing providers in this regard.

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Transition management will undoubtedly climb up the agenda for DC schemes, especially legacy schemes wanting to transfer to a master trust.

Ongoing schemes will also have to pay closer attention, especially those wanting to take a more paternal approach to how they provide pensions benefits. Where companies want to offer bespoke schemes in line with their corporate philosophy, that offering will have to change more frequently. Greater dynamism will require more transition.

The DC space has already seen considerable product innovation in the last few years, most notably the introduction of diversified growth products. These products have proven popular and sparked a number of transitions as schemes try to enhance their default offering and improve the benefits on offer to members.

Furthermore, it is the duty of trustees and managers to continually review their DC framework and offer the best possible products to their members. As business cycles and asset managers develop and change, this will necessitate more transitioning of assets. “Nobody can be best-of-breed forever,” Finch argues.

Visibility and complexity combine in the DC pension world to compound the risks and costs associated with transitions. As the need for transitions increases, those responsible for managing pension schemes should be looking more closely at the transition management skills and expertise available through their consultant or platform provider. As volumes increase, DC schemes should be more able to leverage the services of specialist transition managers currently popular with their DB cousins, but this option will be highly dependent on the cost involved and how that is charged to members.

For all DC scheme trustees and managers, however, transition is an area of considerable vulnerability and careful management is therefore a must. “Don’t underestimate the time and effort involved with transitions in DC,” JLT’s Finch warns. “Work out detailed project and communications plans. If you don’t there is a big chance something will go wrong and errors are very visible to members.”