Full-time risk managers: Back to the future?
Defined benefit pension funds are becoming full-time risk managers. JP Morgan's Benjie Fraser wonders what that will look like.
Surveying the last couple of decades of how pension funds run their money, are we now seeing a return to an in-house way of doing things? There is plenty of talk about this. And some action.
Certainly, the way trustees and sponsor have to look at their overall picture suggests we could see more of these US-style investment shops sitting as independent, FSA-registered entities within the overall scheme arrangement. After all, some sponsors are probably right to think that, with their defined benefit fund arrangements capped, the company now owns an in-house insurance company. So why not run it like one?
Solvency management, fiduciary management, delegated consultancy, empowered investment committee - these all mean the same thing: defined benefit pension funds are becoming full-time risk managers. What's it going to look like?
Largely, this will depend on the largesse of the sponsor that will need to support the expansion of these investment offices. Will these in-house arrangements pay their way? Long term, clearly some people think they will. In addition, should these in-house managed teams go out and find work with third-party trustee groups?
This has been tried before in the UK with mixed results. Though that doesn't mean it shouldn't be tried again. After all, across the North Sea, the Dutch naturally organise themselves into industry-wide and geography-wide arrangements.
Is that organisation a natural one, you ask? It did, after all, take the intervention of the regulator to demand the whole industry do some slimming with the overall number of plans. It worked. Will there be supertrusts for the UK? The scale of a supertrust would doubtless give its member pension funds broader investment opportunities, the possibility of reducing costs and sufficient resource to provide strong governance, requiring a smaller but more well-trained pool of talent. Similar ideas have been floated in the past - for example, something for the London local councils - but have failed to attract sufficient support.
Is the time nigh? Given we are living in the age of austerity and enlightened regulation, should we now be expecting some Dutch slimming pills?
Benjie Fraser is managing director of worldwide securities services EMEA at JP Morgan