It used to be that a pension fund manager needed little in the way of qualifications. Like everyone else, he or she learned their business on the job. Now, as European pension funds come under greater regulatory and performance pressure, learning the ropes as you go along is no longer feasible. Instead, pension funds are dividing into those hiring substantial investment staff in-house, and those that are outsourcing everything they can. Whatever their situation, pension funds all agree on one thing: the industry is becoming more professional.
So much so, that it is now possible to graduate with an MSc in Pensions. London’s Cass Business School has designed the world’s first masters with a pensions focus, looking at issues like pensions economics, finance, comparative pensions systems, social policy and ageing, law and regulation, and quantitative methods. It is hoped that graduates will be able to understand how different types of pensions systems have developed, look at how schemes are funded, and the short and long-term risks they face. They should also be able to advise governments, institutions, and companies in any country on pensions matters, and also learn key IT and quantitative skills.
Not to be outdone, the London Business School has launched a Finance and Endowment Asset Management programme, which covers asset allocation, portfolio construction, investment styles, manager selection, performance measurement, and sustainable measurement.
Unfortunately, say pension funds, it is not a question of finding talented and experienced people. It is that investment talent comes at a price. “How can one expect pension funds to be run ‘business-like’ and according to the highest standards of best practise if compensation is amateurish? What selection of talent can this produce?” asks Georg Inderst, an independent pension consultant.
Although there are no figures to compare an average pension fund investment salary with its market counterpart, most pension funds are not for profit, and simply cannot pay out the incentive payments that asset managers can. Head hunters say it comes down to bonus schemes. Some pension funds pay up to a third over salary in bonuses, but this is nothing like the bonuses in the market, which can be in huge multiples over basic pay.
“Pension funds face a pretty huge challenge. It is extremely difficult for them to offer the sorts of remuneration packages which would be competitive in the investment industry. In the industry, people are becoming more conscious of the need to structure innovative compensation,” explains Kim Yates, director and asset management practice leader at Principal Search, the specialist recruitment firm. She argues that personnel want some form of leverage into the business, an equity stake, options, or phantom schemes – something that gears remuneration to the business and the success which results from their efforts.
Most pension funds meanwhile, point out that while they do offer bonuses, they can not compete with the asset management industry. “Salaries have to be competitive to attract people, but they are not competitive in the sense that we cannot compete on the payment of very high performance related fees,” says Steen Jorgensen, managing director and chief executive officer of Denmark’s Finanssektorens Pensionskasse, the industry-wide pension fund for financial sector employees, with approximately €2.3bn in assets under management. He, like many pension funds, argues that it means the fund attracts a different breed of talent – staff that are either looking for a better quality of life, or want to be generalists rather than specialists.
Others argue that nobody joins a pension fund for the money. “We are a public institution, we manage public money. We do it on behalf of several millions of future pensioners in France, and in particular the more modest part of the population. It means we do not need ‘mercenaries’, that is to say, people who want a simple jump in their salaries. We need people who believe in the objectives of the goal, who are attracted by FRR’s long-term horizon, its capability to take some risk, to be innovative and impartial,” says Antoine de Salins, board member of the €27.7bn Fonds de Réserve pour les Retraites, or French Pensions Reserve Fund (FRR).
Unfortunately, that leaves pension funds with a problem. Willem Duddok de Wit, managing director at Goddensfield Associates, believes that a lack of investment talent is one of the reasons why so many pension funds are outsourcing their schemes. “It is increasingly seen as a very difficult job, and with a small staff, you cannot do that very well. So you’ve seen a number of mergers in the Netherlands, and the growth of fiduciary management.” Others point out that pension funds who manage assets in-house now need to hire too many specialist staff to make it a workable solution.
Fiduciary managers may be a solution, but they are also losing staff to the big asset managers. Wouter Pelser, director of the asset management division of Mn Services, says the firm recruits 50% from pension funds, and 50% from the asset management industry. There is always going to be turnover, he suggests, but the trick is to offer a lot of responsibilities to investment staff very quickly, so they become empowered. “Pension funds in Holland are asking if they are well enough staffed, and if they can’t be staffed, they are asking if it is really safe to be dependent on one or two people, and coming to the conclusion that it is better to outsource to professional parties.”
It means, he suggests, a polarisation in the industry. The big players, the ABPs, PGGMs, and PMEs, the billions of euros of pension funds, will always choose to remain independent, but have economies of scale just because of their size. Even then, they are outsourcing the most complex of their strategies.
It is an argument that irks with Arun Muralidhar, chairman of Mcube Investment Technologies, the Texas-based investment management product provider. Muralidhar was head of investment research and a member of the investment committee at the World Bank Fund between 1995-1999, before joining JP Morgan as head of currency research.
“It is not true that asset managers are smarter than plan sponsors, or more experienced in decision-making,” he argues, pointing out that investment managers learn their trade on pension fund money. “There is no academic qualification that brands new and makes you qualified, so it really puzzles me. Many people feel that it is easier and better to pay an external manager large lumps of money, than it is to empower their own staff. But when you look at the potential value add of your staff, the impact of one or two decisions your chief investment officer makes, can really affect the bottom line.”
Muralidhar says he left the World Bank, where all members of the team had a great deal of responsibility, because he wanted to see how “jazzy” investment management really was. “Even if the box changed, the job was the same, so what I really learned is that asset managers had different ways of doing business because they were empowered. If you empower your pension staff with opportunity, then they have little incentive to leave.”
Muralidhar says that he preferred the pension fund side of the business. It is a sentiment shared with Patrick Groenendijk, chief executive of the Dutch Pensioenfonds Vervoer, the industry-wide transport sector fund with €5bn under management. Groenendijk spent three years as a strategist with Dutch metal industry pension fund PME, and then joined Barclays Global Investors, where he was responsible for strategic client relationships. He left his position after only seven months, to join Vervoer.
“I had heard a lot about working for the industry, but I’d never had the experience myself. My reasoning was that BGI had a very broad product offering, and I hoped I would be exposed to a broad variety of topics, but there was a lot of specialisation,” he says. It may look sexier to work for an asset manager, he says, but there are a lot of very intelligent people working in the pensions industry. “There’s always a danger of asset managers and investment banks trying to take away your staff, especially the institutions you don’t do business with.”
But head hunters and industry observers say there is often a cultural difference between the two groups. “There are people who have the intellectual bent towards pensions, and there’s quite a lot of interesting work being done by in-house pensions people, especially in the corporate environment,” explains Andrew Drake, a former consultant at PSolve, who moved over to focus on the pensions advisory business at Morgan Stanley. The type of people attracted to the pensions industry, he suggests, are those who aren’t seeking the last pound of compensation, but are less happy in a high pressure sales environment.”
Yates agrees. She points out that in the investment industry, you have to keep your head above water every quarter, and deliver the goods. The very best in the industry are attracted to the pressure, and would not find the pensions industry a step back. Senior people in the asset management industry, however, see pension funds as a place where they can use all their skills and experience, without some of the same competitive pressures. “A number of asset management people are taking up the position of investment adviser. That’s not a full-time post – they meet quarterly and typically are
paid £10,000 a year (e14,700). But you’re not going to stick your neck out for £10,000 a year.”
Still, there is also the issue of whether pension fund investment personnel are even interested in joining the asset management industry. Gordon Hogarth, who heads up the asset management practise at Rose Partnership, the executive search firm, does not believe it is a big issue. “Why would someone who is an investment director in Leeds actually want to relocate to London to work in the City? I’m not sure they always would.”
He argues that asset managers rarely recruit from the pensions industry, with some notable exceptions. “Final salary schemes are being phased out and everything is moving into money purchase schemes. You’re talking about administration talent rather than money talent. I wouldn’t say it’s a trend.”
For their part, pension funds say it is a problem. Some say it is a question of retaining staff, while others say it is a question of attracting staff. “Whether specialist staff will be required or not depends on the business model of the pension fund. For example, are they outsourcing administration or investments or both? The specialist companies always need to recruit from the market. Nonetheless, even with outsourcing, one or more well-incentivised people are needed in the headquarters,” says Inderst.
For Yates, the issue is a forgone conclusion. “Pension funds are left with the conclusion that they can’t afford to have top quality asset management teams in-house. It’s the same decision that a lot of insurance companies took as well, but in their case they ended up owning asset managers so they could run their assets. That’s why, one after another, pension funds have given up the ghost in terms of trying to maintain in-house teams.”
But there are some determined to buck this trend such as Hermes in the UK and Mn Services in the Netherlands.