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Improving outcomes for retirement fund members in a post COVID world: the trend towards an integrated approach

14 April 2021 John Anderson, Executive: Investments, Products and Enablement at Alexander Forbes

Life has changed. The world of work too.

The world has changed and with it, a new landscape of work and way of living. Places of work, our roles and relationships, our health and well-being, and our futures have all shifted.
Employers need to transform their organisations using their resources and employees to propel them into the future. Fiduciaries of employer-sponsored retirement funds need to deliver more meaning and better value.

Integrated models tend to provide better outcomes

In split-service models, different service providers render a specific service. In integrated service models, a single, multi-networked provider render core servicing functions such as investment strategy design, asset manager selection, unitisation, investment and member administration.

Whilst there are pros and cons to both split-service and integrated models, integrated models remove the burden for fiduciaries such as trustees and employers and are better suited to keep pace with changes.

This trend is evident internationally, where “an outsourced Chief Investment Officer model” has become increasingly popular in managing retirement fund investment strategies (as opposed to services being provided by multiple separate service providers). This has been in response to the challenges brought about by the global financial crisis in terms of low interest rates, market volatility, low growth, increasing regulatory and compliance burden and access to the broad skillsets needed to ensure good returns to members.

With the introduction of “pooled employer plans” in the US, more employers are outsourcing the management of their overall retirement fund arrangements. This is similar to the trend in South Africa where more employers are converting from running their own free-standing arrangements with multiple service providers to rather participating in an umbrella fund where the administration and investments are packaged. The recent challenges brought about by the Covid-19 pandemic have further accelerated these trends.

Overall, the appropriateness of a split-service or integrated approach should be based on which approach delivers the best outcomes for retirement fund members in the following two areas:

1. Achieving good returns on retirement savings whilst saving during employment
Below we have analysed the net returns over the 10-year period to 31 December 2020 for various growth portfolios used to accumulate savings before retirement. The analysis was based on available information on large retirement funds using a split-service approach. This was then compared to the average retirement fund (as measured by the Alexander Forbes Global Large Manager WatchTM median returns), as well as an integrated multi-manager approach as represented by the Alexander Forbes Performer portfolio.

Source: Alexander Forbes analysis, December 2021

We also analyse the risk and returns for the 3-year period where the information was available.

Source: Alexander Forbes analysis, December 2021

Both approaches have fared well across all time periods compared to the Alexander Forbes Global Large Manager WatchTM median returns. However, the returns across all periods over the 10 year period show that the integrated approach consistently outperforms the split-service approach, and at lower risk according to more recent information.

We expect that an integrated approach will continue to provide higher returns at lower risk whilst providing an impact and doing good. This approach helps trustees and employers simplify how they run their arrangements, reducing the time and effort they spend on complex investment issues and allowing them to focus on other strategic areas to improve member outcomes.

2. Ensuring efficient and secure administration is critical for a good outcome
The recent Covid-19 pandemic has shown the importance of ensuring that systems can withstand shocks to the system. This requires integrity of systems and full ongoing alignment between assets and liabilities.

Three key operational components need to be in place in retirement funds to ensure sound administration of members’ retirement savings:

• A member-record administration system that can accommodate daily unit prices
• An investment administration platform that can calculate daily unit prices
• An ongoing monitoring framework to ensure that a fund’s underlying assets (as reflected by the investment administration platform) matches its liabilities (as reflected by the member-record administration system)

Why should the member and investment administration systems be integrated?

• With the member and investment administration systems being compatible, reconciliations of transactions between them can be done on a real-time basis, significantly reducing the risks of any mismatching between these two systems and enabling transparent reporting.

• All systems are appropriately amended in unison where regulations change, such as the default regulations introducing default preservation and annuity strategies.

• The time lag is reduced between when unit prices are calculated and when those unit prices are applied to member records.

• All checks between assets and liabilities factor in any changes or enhancements across either the member administration or investment administration systems.

• There is accountability for errors. Where multiple providers are appointed, errors may prompt providers to blame each other rather than putting members in the position they should have been.

Evidence demonstrates the value of an integrated approach as trustees and employers aim to keep pace with developments and simplify their arrangements with the overall objective of improving member outcomes. We expect these trends to continue.

 

Quick Polls

QUESTION

Financial behaviour experts suggest that today’s risk modelling methodologies ignore your client’s emotional ability / behavioural capacity. What are your thoughts on spicing up risk profiling tools to make allowance for your client’s financial behaviours

ANSWER

[a] Bring it on; my client’s make too many irrational financial decisions
[b] Existing risk profiling tools are adequate
[c] Risk profiling tools should be based on the model / rational client
[d] The perfect risk profiling tool is science fiction
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