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Pension funds must control consultants, Watson says

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GLOBAL – Pension funds need to exert more control over agents acting on their behalf such as investment consultants and asset managers, says Watson Wyatt.

The consultant says pension funds “are not getting the value added they require from the investment ‘food chain’” – that is consultants, managers and brokers.

“To improve this problem, pension funds must exert stronger and more effective control over these agents.” It said that funds are exposed to the “agency problem” in that the agents’ interests may not coincide with those of the fund.

The complexity of the funds’ needs and the interaction of a number of agents may mean the various parties do not make a cohesive team. “The result has been that the costs employing agents have been high.”

“They key question is whether pension funds are getting good value for this outlay. We have our doubts.”

In terms of consultants specifically, Watson is clear. “Ultimately, the onus is on the pension funds to ensure that they are getting value for money and alignment of interest from their consultants.” It advocates monitoring consultants on a balanced score-card basis, as strict numerical measurement is not possible.

For investment managers, the firm advocates a change in fee structure, based on a two-level structure. The first component is a fixed fee in a fixed currency to cover overheads. The second is a variable fee related to performance.

The comments come in a new 30-page Watson Wyatt report called “Thinking Ahead” – authored by the firm’s ‘Thinking Ahead Group - which aims to map out an agenda for change.

The report says that short-termism has become a real problem and benchmarks “have developed an influence that was never intended”.

It puts forward the idea that 10-year mandates and absolute returns offer possible solutions. “We argue that managers should not be terminated for performance reasons alone.”

It also says that “a new form of multi-asset management” may solve some problems. “This new form of mandate could allow us to return to an absolute return orientation, and to access investment manager skill by giving wider freedoms across more asset classes and types of securities.” It stressed that it was not calling for a return balanced mandates.


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