PensPlan Laborfonds is a retirement pension system managed by Centro Pensioni Complementari Regionali Spa (Centrum) based in Bolsano, in the Italian region of Trentino-South Tyrol. It operates as a sponsor for regional pension funds, co-ordinating all-participant and affiliated entities when setting up complementary pension funds.

As opposed to other complementary schemes across the world, PensPlan is a hybrid retirement planning system with services applicable to any number of client categories, individual or collective, within the Trentino-South Tyrol region. This means that even though it is limited by a regional jurisdiction, PensPlan is not limited to provide only one type of complementary pension plan. It has assets of e75m.

The fund, that agreed an asset allocation of 60% bonds and 40% equities, went through a interesting manager selection process conducted by Centrum.

Taking into account the fund’s requirements, Centrum developed a manager selection system that differs from the traditional manager search models, and could be seen as a model to follow by other pension funds throughout Europe that are planning to undertake such a crucial selection decision.

Manager selections usually involve many competitors, providing a large amount of information. To evaluate all this data is time consuming and costly.

Ideally, the whole evaluation process should be done by the same person within a group, ensuring application of the same criteria. However, because a certain amount of deviation occurs during this activity, Centrum wanted to develop a method that could avoid it. They also wanted to provide a robust and transparent way to rank a set of money managers taking into account both quantitative and qualitative data.

The result was a request for proposal (RFP) ranking method based on an expert system driven by a decision tree model that uses a set of logic nodes to evaluate the inputs. This system was developed to improve the standard evaluation method of a questionnaire.

Traditionally, these rankings are done by giving each question a weight expressed in market, with the final evaluation representing the sum or average of the questions, which can easily result in misleading conclusions.

In a computer-based ranking system, the RFP must be structured as much as possible with tight answers that constrain the managers to be precise and unique. Once the RFP is defined, it is necessary to standardise the data of each answer through a 0–1 range before passing to the decision tree.

The way used to standardise data is a continuous, parametric, cumulative function that assures flexibility and avoids jumps in the evaluation process. The tuning of the discrimination curve is made with two parameters: the centre of the distribution and the steepness of the curve.

Each question on the questionnaire represents an input for a leaf in Centrum’s decision tree. Having defined the decision trees, it is possible to decide which logic should be used to evaluate the result of each node.

In the case of PensPlan, the questionnaire, that included pre-defined criteria established by the fund, was sent by email to potential managers.

The system then analysed the collected data, creating a ranking of competitors based on a quantitative evaluation. The final choice of the managers was made after direct presentations of the short listed candidates.

The selected managers for the PensPlan Laborfonds assets were ING Investment Managers for European for global bonds, SanPaolo Imi Asset Management for European bonds and Italian equities and Lombard Odier for European equities.

Although it is early days in the fund’s investment life, the manager selection process undertaken shows PensPlan’s commitment to seek best practice and transparency in pension management, and Centrum’s ability to create a method that can improve the evaluation of managers and lead to a more objective and better assessed manager selection.

This selection method provides a framework for ‘decision testing’ that can be used by both the board of the fund when the criteria for the manager selection are fixed, and by the operative analysts to drive the selection.

The system, that can be tailored for each type of questionnaire, that assures constant consistency regardless the size of the data analysed, can also include a set of extra rules to test the coherence of the data provided by the managers.

Because of its sophistication and flexibility, this model could easily be followed by other pension schemes undergoing similar processes. In the case of PensPlan it has definitively proved to be a good start for the plan’s investment future.

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