Dutch custodian KAS Bank has created a fintech solution to help schemes save on costs and improve transparency of currency hedging strategies.
The bank called it a "step change" in how pension schemes manage and implement their fund-specific hedging strategies.
The solution, which the bank calculates will save schemes up to 10 basis points, enables them to put one hedge based on the aggregate currency risks across the portfolio. It provides a consistent method for predicting and managing currency risks, allowing schemes full control over their hedging strategies, said the bank.
It comes a year after the custodian launched a dedicated fintech team to build innovative and unique data solutions to help schemes better govern.
Where schemes have pooled investments, ‘KASHedge' identifies true exposure to aggregate currency risks across the full portfolio by using look-through capabilities. Through seamless integration between the bank's fund accounting and treasury platforms, the straight-through processing (STP) overlay solution ensures strengthened governance around currency hedging, according to the custodian.
KAS Bank partnered with fintech specialists MatchingLink to develop the product, which runs on an online platform and can be accessed directly by scheme managers and their consultants in order to actively monitor the strategy. The bank said 18 pension funds are using the service.
The bank's UK managing director Pat Sharman commented: "Trustees in the UK market are increasingly under pressure to demonstrate high governance standards of pension schemes with subsequent reporting. As a fintech innovator, we want to assist with these challenges across the investment cycle and believe adoption of the latest tools and working with leading fintech partners is the most efficient and accessible way to do so."
Business development management for risk solutions Matthijs Verweij added: "Ensuring our services meet the changing needs of our clients is at the core of our proposition and with our experience in the Dutch pension market, we are confident that KASHedge will solve currency hedging complexities and support the overall progression of the UK pension sector."
The bank believes the solution tackles some of the issues with currency overlay strategies that schemes typically use.
"Schemes may have individual hedges on each (segregated) portfolio or per manager, which means the hedges will be done in smaller shapes/trades versus hedging at the aggregate scheme level in on shape/trade so losing on cost efficiencies," explained Sharman.
"Furthermore, when pension schemes have invested in pooled funds that are inclusive of foreign currency hedging the pension schemes has no flexibility on the hedging levels or policy of the fund. By having one overlay across the scheme the trustee has full control and flexibility. Finally, when hedging is not done at the aggregate level there can be situations where there can be a conflict with different hedges and currency positions against each other."
In addition to the currency overlay solution, KAS Bank said it is working on a "pipeline of future activity".
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