A future wherein the buy-side evolve from price-takers to price-givers is very much on the cards as the UK continues to reform its pensions landscape, asserted experts at a Northern Trust roundtable on Wednesday.
Currently, government consultations are focused on plans for the wholesale consolidation of the local government pension scheme (LGPS) and defined contribution (DC) sector, while the defined benefit (DB) arena is remaining largely untouched.
As these changes ramp up, the buy-side is set to reap more power when it comes to managing the assets, subsequently leading to an operational shift within organisations.
Delving into the how, Mark Austin, pension and insurance executive, EMEA, at Northern Trust, highlighted that these reforms should eventually allow pools of LGPS and DC assets to become more self-determined in terms of the oversight of their managers and the oversight of their assets against their liabilities.
The ultimate end, Austin explained, is one wherein “the buy-side is going to start to get much more power and will ultimately potentially become a price-giver not a price-taker.
“[This is] because, when they get to 100-200 billion, they can insource some of that capability that’s currently provided to them by some of the index managers by the employee benefit consultants, and they can actually take much greater control and take a much greater part in managing their assets.
“[…] That’s not something that’s going to happen overnight – consolidation and the government consultations always take ages, but behind the scenes, that consolidation is already happening reasonably rapidly in the DC and LGPS markets.”
Read more: A deep dive into the ongoing UK capital markets reform agenda
Discussing in more detail what this could mean for the structural make-up of the buy-side in this area, Austin confirmed that there is potential for real change.
“It really depends on how those how those big asset pools structure themselves, but we can foresee certain areas in the future where an asset manager and a very large buy-side pool will collaborate on a bespoke index.
“That will enable them to differentiate themselves, because ultimately these big pools are going to end up in competition with each other […] We don’t see the future being how it is at the moment, wherein you issue a mandate, have a beauty parade, everyone submits their RFP and their price, you choose one and you’re off to the races. There’s going to be a lot more long-term collaboration between both sides.”
John McCareins, head of international asset management at Northern Trust, further expanded that it’s important to not have an inward-looking methodology going forward and instead seek holistic solutions to the continued consolidation of pools.
“We don’t think about ourselves, we need to move away from asset management or asset servicing and really think how we engage with large, sophisticated investors as a problem solver.
“[…] There’s enhanced collaboration amongst our different groups and we’re jointly sitting down and saying how do we co-develop an integrated solution from investment design, through implementation, oversight, monitoring, reporting and all the analytics behind it.”
Those set to suffer most from this change are, understandably, the smaller boutique asset management firms which historically have had their success defined by winning ‘beauty parades’, added McCareins.
“Now that beauty parade becomes less and less frequent and the discussion ends up starting in C-suite, there might not even be opportunity for you to compete in the future. Of course, it plays into some of our strengths, but that will change the makeup of the industry, and namely how boutique firms think about value proposition and strategy.”