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Investment Solutions: Delegation targets lower risk

Andrew Waring, chief executive of the UK Merchant Navy Officers’ Pension Fund tells Nina Röhrbein about the scheme’s delegated CIO approach

Merchant Navy Officers’ Pension Fund, UK
Assets: New section £2.4bn (€2.8bn)    
Old section £1.4bn (€1.6bn)
Location: Leatherhead, UK

The Merchant Navy Officers’ Pension Fund (MNOPF) started its current fiduciary structure in the wake of the financial crisis in 2008, when the fund sought much stronger ownership and accountability for the development and the implementation of its investment strategy.
MNOPF had already outsourced a lot of its investment manager activity in the 1990s and early 2000s, so when its current chief executive Andrew Waring joined in 2008 all investment management was managed externally with the support of investment advice from Towers Watson.

“There was a lack of accountability and responsibility for the whole decision-making process,” says Waring. “The pension fund wanted to move to a better fiduciary structure in order to get maximum returns from its governance budget in the increasing complexity of investment markets.”

But with its then £3.5bn in assets under management and due to its pursuit of diversification and active management, the pension fund considered itself too small to run its own in-house team.

During an initial 12-month appointment of Towers Watson, MNOPF conducted a full market search for a fiduciary manager. This led to the appointment of Towers Watson, which is referred to as the delegated CIO (DCIO).

“What is distinct about our model is that we have an advisory relationship with Towers Watson on all the strategic items such as all asset liability modelling, risk budget creation and the development of the strategic investment benchmark,” he says. “Once we have agreed the risk and the investment strategy, the implementation is fully delegated. In fiduciary models outside the UK, often there is not the same clarity for who is responsible for what, with many investment committees retaining the ultimate decision-making authority.”

That means Towers Watson has the authority for hiring and firing managers, without having to consult the investment committee for approval.

The DCIO is also responsible for negotiating fees with the managers, signing the investment management agreements on behalf of the trustees, compliance monitoring and liaising with the custodian.

Hymans Robertson is responsible for the oversight of the CIO; Waring compares this to a non-executive director role, providing checks and balances on the DCIO.

“Hymans Robertson’s job is not to second-guess our DCIO but to ensure that the DCIO’s ideas are right for the fund,” says Waring. “They provide detailed oversight over a wide range of issues from the quality of recommendations and advice through to the depth and breadth of staff working on the account and to performance measurement and proxy voting. For us, to have a strong level of oversight over the fiduciary manager is critical, especially as we do not have independent investment experts sitting on the investment committee.”

As a result of the appointment of the DCIO, the number of asset managers for the pension fund rose from 15 to 35. In addition, MNOPF added six new asset classes – commodities, emerging market currency, reinsurance, global and sovereign investment credit, non-investment grade credit and currency hedging – to its existing asset mix.

With the pension fund having a complex and diversified investment strategy, to measure the performance of the DCIO, MNOPF has a reference portfolio of 50% LDI and 50% equity.

“We have been comparing the performance of our strategy against the reference portfolio since 1 January 2011 and over that period we have been achieving similar levels of performance to the reference portfolio but at much lower risk,” says Waring. “The lower risk is a result of the diversification of the asset classes and diversification of style within the asset classes.”

MNOPF will be reviewing the three-year contract with the DCIO in the second half of the year. In addition to analysing the returns, the pension fund will also review risk measures and softer operational areas as part of its balanced scorecard approach. But Waring admits, the assessment of the DCIO’s performance is still evolving.

There are two sections to the MNOPF – an old section holding all the benefits accrued up to 1978 – and a new section post-1978, which still has active members.

“The successful implementation of the DCIO framework meant that the old section achieved its settlement objective a lot faster, which allowed the trustees to de-risk the portfolio more quickly through completion of buy-ins with Lucida and Rothesay Life,” says Waring. “We will ultimately be looking for a similar de-risking approach for the new section.”

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