From Our Perspective: Ready for action
Industry figures like Roger Urwin of Towers Watson have long advocated that pension funds should use their fee budget effectively according to their size and scale, perhaps foregoing costly alternative strategies in favour of recruiting in-house staff.
A core pension fund investment model has existed for many years in continental Europe particularly. Here, mid-sized funds especially run domestic fixed-income or equities in-house, and some have fairly sizeable administration teams. Certain other strategies might also be run in-house – some Dutch pension funds and smaller fiduciary managers run concentrated equity portfolios themselves, for instance.
A variant of this model is for larger funds and pension fiduciary managers to manage a considerable portion of the portfolio themselves; in the Netherlands and other countries there has been a clear consolidation trend as smaller and mid-sized funds have outsourced their assets to these larger entities.
The ‘investment office’ model has gained ground. Some larger and most mid-sized and smaller UK funds have, for many years, used very lean structures for asset management and administration with a high degree of outsourcing. In recent years, some have reconfigured this model to stock up on in-house investment expertise via a dedicated and highly skilled team.
In parallel, in the Netherlands, early adopters of fiduciary management have also built up internal expertise, sometimes following regulatory pressure for greater internal oversight of fiduciary managers. In both countries, this has led to the creation of investment offices – small teams of highly skilled executives able to run strategy and oversee managers. These teams can be highly adaptive; they may sometimes make short-term tactical plays or flexible strategy shifts in investments or liability hedges.
Increasingly, pension funds are looking at illiquid opportunities in infrastructure, property or private credit markets. The likes of ATP are scaling down their direct hedge fund operations and scaling up in a new way, recognising that these new investment opportunities often fall outside of traditional asset class buckets.
The result is multi-disciplinary teams that could include lawyers or management consultants or other non-traditional specialists. These teams are mandated to be fast and effective: they assess private market investment opportunities in a short time frame and can act quickly, sometimes with delegated authority from the investment committee.
In this issue of IPE we focus on the topical issue of pension fees and costs in a special report. Over recent years there has been a discernable wind of change in favour of greater transparency on asset management and other costs, particularly for public pension funds but also across the board in several countries, among them the Netherlands, the Nordic countries, Switzerland and the UK.
But costs vary and larger pension funds usually use more complex investment strategies and are more likely to pay performance fees, with commensurately higher costs.
The effectiveness of the investment strategy is another matter and costs and transparency are not the only operative elements. A single TER figure cannot capture the complexity or simplicity of a strategy and it would be foolish to measure annual cost figures against short-term return outcomes.
Pension funds do, of course, need to prove to the relevant stakeholders over an appropriate timeframe that their strategy is delivering the desired results. Those metrics need to be clear, agreed internally and widely communicated, with clear answers as to the ‘what’ and the ‘why’; of the strategy. If pension funds are to act as effective long-term investors they will need to do so with the appropriate internal and external resources. Stakeholders must be prepared to take a long-term view on strategy and cost.