The biggest problem facing UK occupational DB schemes is failure of the fiduciaries to exercise proper control of their big three issues- equity volatility, interest rate volalatility and adverse changes in mortality.
In the late 90s, the big occupational DC schemes were floundering and the insurance companies came up with bundled products which took out the operational risks, reduced and reaportioned costs and gave organisations the communications package to get employee engagement.
The asset managers failed to engage with the corporate agenda and concentrated on fund solutions that didn’t adress the real problem. They are and will remain marginal in the DC space.
While the larger DB funds can afford to hire their own CIOs, source bespoke LDI solutions and hedge out ther scheme specific mortality risk, the cost of doing so is beyond the means of most DB trustees and their sponsors.
The way is open for the insurers to package solutions to the mid and small scheme market that draw on second mover advantage. L&G have a range of LDI “bucket” funds, DGFs are now developing to a point that they will provide a packaged solution to the equity problem and it is only a matter of time before a pooled mortality product comes to market. So the tools are available.
What is now needed is for these tools to be succesfully packaged and promoted in a way that trustees and sponsors understand. A packaged solution to fiduciary management that enable trustees to take timely decision or allows them to outsource these decisions on a pre-agreed basis, is the obvious way forward for schemes that cannot afford the cost of buy-out.
For packagers who can get it right, we can see long and happy relationships between the packagers and trustees which will get schemes back to solvency and protect the long-term interests of members.
Provided the packagers are smart and provide open architecture, they should leave suffecient space for current advisers to add value. However they will have to adapt to the changing market as they did with DC. It will be interesting to see how long it takes for the DC experience to be repeated, I suspect it won’t be long!