UK - The economic downturn has caused pension trustees to gain a "full appreciation of the risks out there", and led to a renewed focus on planning for the time when markets recover and forced pensions officials to rethink allocation strategy, claim consultants.
John Finch, divisional director for the investment consultancy at HSBC Actuaries and Consultants, suggested that "through much of the market turmoil of the last year was not a time to take action. But trustees should have been looking at what action they should take at certain market levels, to stop some of the shocks they suffered from happening again. It is a bit like planning a journey, setting out when to take action, what the objectives are and how to implement it," he claimed.
He pointed out that trustees have a lot of decisions to make, and that diversification is just one part of it, although he noted "one of the traditional ways of approaching diversification over the last year has not really worked, as correlations have closed up".
Finch, who is one of the nine nominees for the Outstanding Industry Contribution Award at the IPE European Pension Fund Awards in Dublin on 18 November, specifically argued that "static allocation has not worked, particularly in the alternatives area and delivered the expected benefits."
Instead, he suggested that "rather than allocate something to all of the asset classes, there may be a case for many schemes to appoint a manager to take on the allocation across the alternatives portfolio, and for the equities investments so it covers the whole growth pot".
He claimed: "Consultants are not good at this allocation, and trustee panels are not really good at it. So instead of hiring half a dozen managers, trustees should hire someone to manage the day-to-day mix, allowing them to make moves quickly and in some cases even go liquid."
He suggested there is a need to better define the role of the managers, and argued that reducing the number of managers to look after assets also reduces the governance burden on trustees.
"Complex manager structures are good for consultants but not necessarily for clients. It's about doing the right thing for the clients," suggested Finch.
Two possible options that trustees could consider, he argued, are the appointment of an allocation manager across the scheme's growth asset mix, or the use of a "completion fund".
Finch continued: "The question is how to get the diversification without hiring a huge raft of managers. We need to look at how all the bits fit together."
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