The pension fund perspective
For Patrick Groenendijk, chief executive of the Dutch Pensioenfonds Vervoer, the industry-wide transport sector fund with over €5bn under management, outsourcing operations is not necessarily a cheaper option, but one that makes the most sense. “We get access to the best people in the world this way. I’m not sure this is the less expensive way of doing things, but it’s also a question of getting good talent to come over and live in Holland,” he says.
In May, the fund appointed Goldman Sachs Asset Management to run a €5.4bn fiduciary mandate. The brief covers all of the fund’s assets. “There were a couple of reasons for outsourcing. Before November last year, we had no organisation whatsoever. We started by setting up a small office and small team. That automatically meant we would not do any internal management. Except for me, there is nobody who works on the investment side,” explains Groenendijk, who says it keeps the office “lean and mean”.
However, he points out that you can outsource as much as you want, but you cannot outsource ultimate responsibility. “You’ll always need people to monitor and talk to the external parties.”
Fonds de Réserve pour les Retraites
The €27.7bn Fonds de Réserve pour les Retraites, or French Pensions Reserve Fund (FRR), is a significant heavyweight in pensions. In 2005, payroll costs were €5.2bn, or 8.6% of the total fund’s budget. This also however, includes administrative staff costs.
The fund does not do any internal management in-house, but it still needs a talented and cohesive investment team. Three people making up the strategic asset allocation department, and an additional three manage tactical asset allocations. There is a further department for manager selection and socially responsible investments (SRI), which currently stands at two-strong. Then there is a department which is responsible for following up all the mandates except the SRI ones, and that is composed of seven people. An additional five people control the middle office, and a dedicated team of four focus on risk control and performance analysis.
“From time to time, we hire consultants, as we did for our first big tender, but basically the idea is, on most of the asset classes, to internalise this function. In parallel, when a mandate is granted and activated, we want to know what the manager is doing in terms of consistency of the investment process, reporting, etc,” says Antoine de Salins, a board member.
The fund has about 30 managers around the world, and each have different systems and legal frameworks. “We are not managers, we are not stock pickers, but that doesn’t mean it is not perfectly legitimate to follow up on a regular basis,” he says.
Unlike smaller pension schemes, where investment staff are generalists, FRR needs specialists to focus on bonds, interest rate instruments, equities, and private equity. De Salins points out that as the market gets increasingly complex, internal expertise is absolutely necessary if staff are expected to engage in dialogues with the managers.
He says it has not been difficult to find the investment skill the fund needs, but FRR is also a pension fund heavyweight with lots of opportunity. “It seems to me that the natural consequence of important responsibilities and visibility towards the industry is a certain stability in their jobs. What is really rare in our career is to be part of the development of a whole new organisation. It creates a sort of “task force spirit” where confidence within the team is of crucial value. And when you also have MPs and representative of the treasury and trade unions on your board, it gives you a sense of the importance of what you are doing for the community.”
London Pension Fund Authority
Peter Scales, chief executive of the £3.5bn (€5.1bn) London Pension Fund Authority (LPFA) is on the look out for a new investment director, following a reshuffle of the firm’s senior management team. But, he says, hiring is never easy. “It’s difficult to track down the calibre of experience that we want. We have a limited selection.” The fund, which has been re-organised along investment management and pensions administration lines, spends about 75% of its costs on personnel, the bulk of which are administrative staff.
Unlike many of its counterparts, the LPFA does not provide basic investment qualifications for its staff. The problem, suggests Scales, is that it naturally leads to people heading off to asset managers. Instead, the staff is qualified to understand how systems work, but not to work in investments. “It just wouldn’t pay us to train people up to full investment managers because they would end up going on.”
Günther Schiendl, head of investments at the €2.1bn Austrian pension scheme APK, says the fund typically hires people either out of university, or young professionals. “A pension fund is a different animal, and fund managers already have built up their expectations about their job profiles and duties. They might be less willing to change this.”
The fund does not pay the same bonuses as asset managers, but Schiendl argues that it is able to retain people because it provides an “intellectually stimulating environment”. The investment team of five, plus the CEO and CFO, are involved in asset allocation, risk management, and tactical asset allocation. Earlier this year, the team also took over the management of its major fixed income bond fund. The rest of investment management is outsourced.
Schiendl says the team’s talent more than matches that of asset management. “We take pride that we are time and time again in a position of delivering an investment product that is as good or even better than those supplied by the investment industry. We wish to be as good as those people are. We work together with them, but we nevertheless try to be in some parts better than they.”
Steen Jorgensen, managing director and chief executive officer of Denmark’s Finanssektorens Pensionskasse, the industry-wide pension fund for financial sector employees, with approximately €2.3bn in assets under management, says he is in a long-term business. “We are able to offer better long term planning, where you get the freedom and resources to manoeuvre.”
One problem the industry has, he suggests, is that there are fewer young people entering into it. The fund has an investment team of five, and manages about a third of its assets internally. It does not disclose staff costs, but Jorgensen says investment professionals accept a decline in their salary when joining in favour of getting a more all round job, and a better quality of life. “You get more people 40 plus who are attracted. Then you have people who say that a pension fund would really suit them for 3-5 years because they have small children. Typically, he says, personnel stay for between three and five years, and are often lured away by other pension funds, rather than asset managers.
Doctors Pension Fund Services
Jan Willem Baan, chief investment officer of the approximately €11.7bn Doctors Pension Fund Services in the Netherlands, says that there is no real distinction between commercial institutions and pension funds as far as remuneration is concerned. The fund has formed a small team where every player has a lot of responsibility. “In practise, we see that people working within very large teams are not always happy with the few square feet allocated to them in that large team. But you have to be prepared to pay,” he says.
The fund has an investment team of seven, and 50% of its costs are related to personnel.