How white-label funds can improve efficiency

Updated September 2011

TLT head of pensions Sasha Butterworth explores how defined contribution (DC) schemes can increase the efficiency of their investment process by creating white-labelled funds.

These investment vehicles, which make no mention of the underlying fund managers, allow schemes to make changes to the fund options without a costly communication exercise to members.

Schemes implementing them should ensure the choice of funds are in the members' best interests, and meet statutory requirements. They should also consider what changes need to be made to their Statement of Investment Principles (SIP).

Usually, DC members are given a list of trustee-approved managed funds, from which they choose where they would like their contributions to be invested.

This can cause problems when a chosen fund is withdrawn, as schemes have to go back to members to seek further instructions.

Under white-labelling, DC members are invited to select from a range of investment strategies, each designed with advice to achieve a different investment objective, for example, "cautious" aimed at protecting asset values and "higher risk" aimed at achieving growth over the longer term.

Once the member has selected their desired strategy, schemes are then free within the confines of the strategy to appoint and remove fund managers as they see fit.

Investment powers and duties

Schemes usually have wide investment powers set out in their trust deed and rules and under legislation.

However, the investment powers must be used in accordance with their investment duties and they must act within the restrictions imposed by financial services legislation.

Trustees have key investment duties under DC schemes. In broad terms these are:

• Invest the scheme assets in the best interests of members and beneficiaries;
• Ensure the suitability, security and quality of investments and meet the requirement to consider the need for diversification;
• Prepare, maintain and from time to time revise a written statement of investment principles.

Delegating investment powers

Generally trust deeds include provisions excluding or restricting the liability of trustees for their acts or omissions.

Trustees cannot exclude or restrict liability for breach of their duty to act with reasonable skill and care in the performance of any investment functions.

Legislation provides that trustees will not be liable for the acts or omissions of a fund manger to whom they have properly delegated investment powers, provided that they have taken all reasonable steps to satisfy themselves that the fund manager has appropriate knowledge and experience and is carrying out the work competently and complies with the legislation.

Under financial services legislation, schemes are not allowed to undertake "day-to-day", as opposed to strategic, decisions about managing investments unless those decisions relate to investment in pooled investment products. Any such decisions must be delegated to an authorised person.

Schemes should consider the following issues when white-labelling:

• Check the exemption provisions in the scheme's trust deed and rules and the investment powers;
• Ensure that members' best interests and choice of investments meet the statutory requirements;
• Communication with members has to be carefully worked out;
• The SIP has to be reviewed and amended;
• Consider a filter or traffic light system to identify potential difficult cases to help minimise potential exposure to risk for the trustees.

Why move to white-labelling?

Schemes cannot absolve themselves from their investment duties by using white-labelling, but it does provide increased flexibility both for the trustees and the members.

Although default funds, used by most DC schemes, have not been litigated yet in the UK, trustees may have increased protection where a member has chosen an investment objective rather than being placed in the default fund, as the member did not make a choice.

Some members find it easier to choose an investment objective, rather than choosing from a list of funds.

If the member making the selection signs a form acknowledging they are taking sole responsibility for their own investment decisions, then it is possible they may be prevented from subsequently bringing a claim against the trustees, provided it can be shown that they were making an informed decision.

However, their agreement may not be enough to bind their dependants.

Next steps

If you are considering white-labelling, first agree what you wish to achieve through the white-labelled funds, and work with your investment adviser to work out the asset composition required to construct bespoke funds for your pension scheme.

Next, make sure you liaise with your legal advisers to discuss any amendments required to your pension scheme’s trust deed and rules, and consider how to communicate with members.

This publication is based on an article that originally appeared on SchemeXpert.com, an online service provided by the Financial Times. It is intended for general guidance and represents our understanding of the relevant law and practice as at August 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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