Intertrust has recently gone out to tender for the provision of trustee, administration and investment management services for its employee pension plan. Head of Performance & Reward Management, Tania Bearryman, has found it to be a fascinating process that has highlighted some of the primary considerations around choosing the right providers for your employee pension.
The first requirement is to go back to basics and consider the purpose of a pension plan and who will benefit from it in the long run. For us, it’s about getting the accumulation of assets right so that our employees’ retirement aspirations can be met. This is such a simple statement but one that has so many complex considerations along the way.
What proportion of employees opt to take up a pension? This is the first hurdle for anyone in realising their retirement dreams… you have to be in it to win it! Employee communication and education is key as we live in a materialistic world that pulls young employees away from saving for their retirement, let alone a deposit on their first home.
The big picture though suggests that government support will only reduce over time. The population in many advanced economies is ageing and the drain on social security funds will reach a tipping point so saving for retirement from an early age is vital and is just the first step to achieving a comfortable retirement.
The mound of regulation, guidance and legal precedent surrounding the trustee and employer responsibilities towards the choice of investment in their pension plan is staggering.
The choice of investment options for accumulating wealth for retirement is the most important decision facing any employer or trustee and the employee then has to make a selection from the choices presented. There seems to be a broad spectrum of options but the decision in choosing the “right” one is sometimes driven by the wrong parameters.
There is also some confusion around who is responsible for the investment selection process. Employers can be seen to be responsible where an insurance product is chosen, but where the pension is in a trust solution, the trustee is responsible. The trustee is not usually qualified or regulated to provide investment advice to members and the plans are structured so that members make their own choices from the investment options available.
The trustee remains responsible however for ensuring the investment options remain appropriate, selecting the investment manager, monitoring the performance of the investment manager and ensuring that the members have sufficient information to make an informed decision.
In determining what investment choices would be appropriate for our employee pension, the primary criteria were:
- The majority of employees are inexperienced in making investment decisions.
- A financial planning tool would assist members in understanding their own investment risk and return parameters and following that analysis, guide them to an investment selection that would meet their needs.
- We were clear that the right investment choice would be the solution that delivered the best, consistent returns net of all fees. Low fees were not a driver in our decision, rather the most well managed returns (risk vs volatility) after fees were deducted.
- We wanted an investment manager that offered a range of solutions to meet the cross section of members’ needs who are at different stages of their careers. We needed growth and capital preservation options as well as a balanced option suitable for a wide range of employees.
Passive versus Active Fund Management
This represents the age old debate that continues in cycles year after year. Our economy has experienced an unprecedented 10 year bull market. Tracker funds with a passive allocation to the indices that they track have done very well. In bull markets they do well, in bear markets they do badly and there is no way of limiting the downside because they’re forced to hold shares in the companies that make up the index that they track.
In sustained bull markets it is difficult to beat the index and over time, the average investment manager has been proven to fall short. However there are managers that do beat the indices and in times of market downturn, it’s these managers that effectively manage the downside risk presented by the index.
A good pension should cater for all members of the fund; those nearing retirement, those just starting their career and those who have built up a carefully nurtured pot but still have 20 years to retirement. Managing downside risk protects everyone and having the right options to meet the full demographic of members is equally important.
Investment Management Fees
In making our selection, we were faced with the full range of self-select, passive index trackers all the way through to some of the most sophisticated manager selection processes and discretionary management solutions available.
At the passive tracker and self- select fund end of the spectrum the key factor we were asked to consider was how cost effective the solution would be, considering how higher fees would mount up over the life of a pension saver’s membership when compared to the low cost solution afforded by tracker funds.
The aim however is to amass wealth, not just save costs. So the key must lie in performance net of fees and not just the fees themselves.
Another consideration is the profile of the employees. Our average employee age is relatively young, they have little or no investment experience or qualifications and even those who are part way through or nearing retirement often have no investment experience. How then are employees expected to decide which funds to choose in a self-select fund offering?
A brief discussion with an investment advisor that focuses on basic risk versus return questions is important, but it does not overlay fund performance against expected returns and the quality of risk taken by one fund manager compared to another.
What we want is for employees to take responsibility for their retirement savings, to understand the risks and returns involved and how those factors will impact the amount they will be able to retire on. This is a very different way of discussing risk and return, with a more informed and involved decision being made.
The solution for our employee pension plan couples personal pension advice for members with financial modelling tools that map their anticipated retirement income expectations to their level of savings and anticipated investment returns.
By turning the decision making on its head, we’re encouraging members to carefully consider their retirement income needs and then map the resultant expected income to the level of their pension contributions and investment risk appetite.
Our solution offers an investment strategy that works to achieve a given return within specified risk parameters without the need for members to switch between funds.
By tying the investment solution into the financial modelling process, the investment strategy selected is made in an informed way within clear parameters that are easy to understand. There is no need for a lifestyle investment option because the financial modelling is repeated regularly and is available to members to return to when their circumstances change.
With these key benefits, we hope to encourage even greater participation in our employee pension and encourage employees to start saving from a young age.
To learn more about Intertrust’s trustee, administration and investment management services for international retirement savings plans and Channel Island corporate and personal pension plans please contact Tania Bearryman.