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Finance

FIDUCIARY MANAGEMENT

by Devan Nathwani, FIA and Investment Strategist at Secor Asset Management

 

Defined Benefit pension schemes are one of the most significant institutional investors, representing c.£1,700 billion[1] in assets. With investments becoming increasingly more complex, regulatory and reporting requirements increasing and markets generally being volatile, making investment decisions is taking up more of the governance budget. This has been further highlighted in the recent Covid-19 crisis where pension schemes were faced with falling equity markets, collateral calls and new investment opportunities arising from market dislocations. Corporate sponsors saw their pension scheme deficits widen at a time when free cash flow was needed to maintain working capital. There is a vast array of investment or de-risking products that claim to have low governance requirements, however often they can require giving up investment freedom and transparency or have high costs. This is where partnering with a Fiduciary Manager can help.

 

What is Fiduciary Management?

Fiduciary Management is essentially a form of delegated investment decision making. Fiduciary Managers partner with pension schemes to give advice on scheme investments and are responsible for the implementation of that advice. Fiduciary Management relationships are often highly customised and do not have to be “all or nothing”. A simple Fiduciary Management partnership could involve a Fiduciary Manager managing a fund-of-hedge-fund portfolio. A more comprehensive partnership could involve a Fiduciary Manager using their investment expertise to make investment decisions on the entire scheme portfolio. In practice, these partnerships can take many different forms and the best relationships are often highly customised, be it in the services received, the portion of the assets covered or the decisions that are delegated.

 

Devan Nathwani

Why Fiduciary Management?

Every pension scheme is different and in practice will choose to partner with a Fiduciary Manager for different reasons. Some common reasons for partnering with a Fiduciary Manager are:

Independent investment expertise

Over the last 10 years pension scheme investments have become increasingly more complex, with alternative asset classes becoming a core component of the strategic portfolio. Asset classes such as Private Equity, Private Credit and Property require in-depth knowledge of the different strategies deployed within them and often require portfolio management expertise to deal with capital calls and distributions and the sizing of commitments. Independence can be crucial here as these asset classes often carry high investment fees and require careful investment due diligence. A Fiduciary Manager typically has deep investment experience in a broad set of asset classes that a pension scheme can in-source without the cost of building an in-house team. Independence can be very important as a Fiduciary Manager that has no association with the underlying managers that a pension scheme invests with, can make investment decisions with minimal conflicts of interest.

Precision and speed

As highlighted by the market impact following the Covid-19 pandemic, it is important for pension schemes to be able to implement their investment decisions with speed and precision. Markets move every single day and investment opportunities can often arise and pass more quickly than a typical pension scheme governance structure can tolerate. Risk management is one of the most important objectives for a pension scheme, with unrewarded risks needing careful management and rewarded risks needing to be sized appropriately. Fiduciary Managers monitor their client portfolios daily and can act quickly to take advantage of investment opportunities or rebalance the portfolio as markets move.

Transparency

As regulatory requirements have increased, pension schemes are increasingly being asked to monitor their investment decisions with more scrutiny. Regulation requires them to consider Environmental, Social and Governance (ESG) factors in their investment decisions and understand the performance of their investments in detail, including the impact of explicit and implicit transaction costs. In addition, as funding levels improve, pension schemes and their sponsors are looking for tighter control and greater transparency over the scheme’s risks. This is particularly important as schemes approach their desired “End Game”. Good Fiduciary Managers typically have proprietary tools and systems that facilitate better performance and risk measurement. As regulations form and evolve, Fiduciary Managers adapt their investment decision making processes to account for them making compliance much easier.

Limited resources

Typically pension schemes and their sponsors have limited internal resources with limited time to spend on both investment and non-investment related matters. Most companies do not have dedicated pensions treasury teams so it can be difficult to devote the sufficient time that is required to both monitoring investment performance and making investment decisions. Where new asset classes are added to a pension scheme’s portfolio, additional training may be required which can take a considerable amount of time, particularly for more complex asset classes. Partnering with a Fiduciary Manager can supplement any existing governance structure by re-focusing pension scheme resources on more strategic matters.

Accountability

Pension schemes typically receive advice from investment consultants who do a good job of advising on strategic matters but are ultimately not accountable for the performance and the outcome of that advice. Pension scheme representatives are increasingly looking for their advisors to be accountable for their advice and the performance relative to the liabilities. Fiduciary Management solutions typically focus on liability relative scheme performance and are governed by the GIPS Fiduciary Management Performance Standard, to ensure a consistency in performance measurement.

Value for money

Fiduciary Management relationships are often all-encompassing and typically cover all investment related matters for the pension scheme. Through economies of scale, Fiduciary Managers negotiate more favourable asset management fees on behalf of pension schemes and are able to get schemes of all sizes access to investment opportunities that would historically only be available to larger schemes. The combination of investment expertise and accountability under a single Fiduciary Management solution, is expected to deliver better funding and performance outcomes which ultimately offers better value for money.

 

Why now?

Fiduciary Management as an investment solution is arguably more relevant today than historically. The recent crisis has highlighted the need for an investment partner who can help manage the downside risks associated with investing in equities, manage the collateral behind important hedges and take advantage of market dislocations. Many corporate sponsors will have seen their pensions contributions eroded and balance sheet deficits widened during the Covid-19 market crisis and a Fiduciary Management partner could have helped better navigate the volatility.

As corporate sponsors begin to consider the “End Game” for their DB pension scheme, they are increasingly faced with the dilemma of entering low-governance investment solutions that may be poorly constructed or paying an insurance premium to “Buy-out” the scheme.

Solutions such as Cashflow Driven Investing (CDI) tend to overemphasise portfolio construction to be based on uncertain cashflow profiles, and excessively exposing the pension scheme to risky credit allocations, which in a post Covid-19 world could expose pension schemes to adverse funding outcomes.

For corporates who prefer to avoid a large cash lumpsum payment for insurance-based buy-outs, a Fiduciary Manager can offer an alternative solution to reaching the required funding level for such a transaction to take place. By slowly growing the asset base while carefully managing risks, pension schemes can become buy-out ready allowing their sponsors to reinvest free cashflow in existing or new business lines.

Partnering with a Fiduciary Manager today could give pension schemes the tools to better manage the next crisis and offer more flexibility in reaching the desired End Game.

 

[1] The DB Landscape – Defined Benefit Pensions 2019 – The Pensions Regulator dated January 2019

 

Finance

HOW LONG DOES IT REALLY TAKE TO IMPROVE YOUR CREDIT SCORE?

Every time you borrow money in the form of a loan, credit card, hire purchase agreement, mobile phone contract or anything else, your credit rating will be impacted. In much the same way, your credit score is also affected each time you make a repayment to your debt, or miss a payment. The type of impact that each action has on your credit score will determine whether you have a low, average or high rating. Somebody who borrows a small amount of debt and makes all payments on time is likely to have a high credit rating, while on the other hand, if you have a lot of different debts and have struggled to make repayments and been late with a few in the past, your credit score may suffer.

Unfortunately, it’s a lot easier to get a bad credit score than it is to get a good one, and one missed payment can have a huge impact. So, how long does it really take to improve your credit score and what can you do to improve it quickly?

 

Don’t Expect Overnight Improvements

Thinking that your credit rating will immediately jump up once you have a paid a debt off is a common misconception that can leave you feeling disheartened if you work hard to repay debts only to find that nothing has changed. But, don’t worry, as long as you keep going, your credit score will definitely improve over time. Negative impacts on your credit score such as missed or late payments can stay there for six years and hold you back, but after that amount of time, your credit rating should get much better as long as you are still in control of your debt.

 

Paying Off Debt without Missing Repayments

If you have a lot of debt, this can negatively impact your credit rating even if you are making the minimum payment each month. Lenders are less likely to consider you as a low-risk candidate to lend money to if you are already paying off a lot of debt, and this in itself can cause your credit score to drop even if you haven’t missed any payments. As a result, the best thing to do is find a way to pay off your debts faster without it having a negative impact on any of them. Thankfully, there are several options that you might want to consider.

 

Debt Consolidation

Consolidating your debts is one of the best ways to get them cleared off and leave you with less to worry about. If you have a lot of smaller debts that you are dealing with, this can become hard to handle as you try to keep up with which payments are due at what times. In addition, having a lot of smaller debts also means that you are paying interest on all of them, meaning that over the long term, you’re paying back a huge amount more than you actually borrowed.

Consolidating your debts means taking out one loan or credit card that you will use to repay each debt. Clearing all your debts with the new loan means that you will only have one debt to worry about replying and one lot of interest to pay. If you have a bad credit score, you can find loans for bad credit scores at New Horizons. New Horizons is a regulated broker that works with a certified UK panel of trusted lenders to help you find the best loan for your situation.

 

Snowball Method

Another option that you may want to consider if you are averse to borrowing any more money is the debt snowball method. Using this method, you will repay the smallest debt first, then use the money that you would normally pay towards this debt to pay more towards the next debt up, which will get that one paid off faster. As you work through your debts, you will free up more and more money as each one is paid off, so that when you finally get to the largest debt, you are able to pay everything that you would have normally been paying towards all your debts combined straight to that debt to get it cleared quickly. Continue paying the minimum payment to all your debts as normal throughout the process so that you do not cause any damage to your credit score.

 

Debt Help

If you are struggling to make repayments to any of your debts, the above methods might not be ideal for you right now. Thankfully, there is help available. You can work with a company to get a debt management plan where the company will negotiate with creditors on your behalf in order to reduce your payments. Although this might mean that it takes longer to improve your credit score, it can prevent serious damage as the debts are still being paid off.

How long it will take to improve your credit score will depend on your situation and the method that you choose to clear your debts.

 

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Finance

SHOULD YOU TELL YOUR KIDS HOW MUCH YOU EARN?

By Kerry Sutherland, certified financial planner at Alexander Forbes

 

Many parents are reluctant to talk to their children about money, but these are important lessons to help them achieve financial independence when they are older – even if you aren’t a financial genius yourself.

 

As children get older, they notice their friends’ houses and cars of different sizes and have discussions on the school playground about their different holiday destinations. “In the senior phase of junior school, they work out very quickly that different incomes yield different lifestyles and this is usually when the question about income gets posed to parents,” said Kerry Sutherland.

 

Kerry Sutherland

“You can tell them that you understand they have questions about money and how much you earn, but answer it by saying let’s rather talk about what food, toys, stationery, extramural sporting activities cost, and if we can afford them and how, and about saving for things like holidays.”

 

Often the exact number is not meaningful to children, they rather want to use it for comparison purposes. “You need not tell your kids how much you earn, but you can use it as a motivator to encourage them to work harder at school if they wish to achieve a certain lifestyle as an adult,” said Sutherland.

 

When your children start with this line of questioning, Sutherland advises using it as an opportunity to discuss basic financial planning. “Explain to your kids that a lifestyle is not always about what you earn, but that it is also about how you manage your money. You can discuss budgeting, keeping debts as low as possible and of course the compounding benefits of long term savings. It is important to emphasise that it’s not wise to spend all you earn every month as when you reach retirement age, you must have saved enough to see you through your retirement years.”

 

“Telling your child how much you earn so that they can brag to their friends is unhelpful. If it’s to explain why you can’t afford a fancy holiday, then just explaining this will suffice. It’s also not necessary to treat it like a secret. If your adolescent asks, it’s important to be honest, open and authentic in your answer.”

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