UK: Opportunities and challenges

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Thinking of recruiting a CIO to your pension fund? Sarah Dudney outlines some of the challenges

Summer 2010 has been marked with new progress in the UK market in fiduciary management with Jeyes Pension Funds and the Jeyes Supplementary Pension Scheme awarding a new fiduciary mandate to SEI. Steadily, UK pension trustees are beginning to take a detailed commercial examination at this emerging approach to pensions management.

But fiduciary management is a complex offering and it is not a panacea for all pension funds. When looking at outsourcing to a fiduciary manager, many pension fund trustees may feel that they are giving up too much control of the investment process. Of particular importance in our current uncertain investment world is the need to monitor the impact of strategic and tactical asset allocation decisions and identify new opportunities, which adds to the demands on their time. For the very largest funds a solution is often the appointment of an experienced chief investment officer. Could this ever be feasible for smaller funds that are not yet ready to outsource all investment decisions? Some trustees feel more comfortable with seeing the whites of the eyes of a senior investment manager who is in their direct line of communication.

Recruitment is always a particularly challenging experience and working out how to bring in senior investment skill to a fund is worth considered reflection for both trustees and plan sponsors. How best to bring in investment skill that is aligned to the goals of the fund and the trustees? How can a CIO be successfully embedded in a fund in such a way that they can be retained for the long term? Recruitment can also be time consuming and a number of pension funds have spoken of their frustration of finding a suitable candidate who then leaves after 12 months.

Pension funds are now well familiar with the concept and significance of using their governance budget to good effect and that includes compensation. The total salary of a CIO in the third party asset management sector can range from £300,000 and beyond. A pension fund can offer an intellectually stimulating role and the ability to achieve work/life balance. Anecdotal evidence suggests that a CIO of a sub-£5bn pension fund in the UK could be on a total compensation package of £150,000-200,000. This represents a different professional track.

A CIO rarely exists in isolation. In addition there may also be a requirement for an experienced risk manager to cover operational and investment risk, for analytical support and for a variety of technology and systems, which all come with a price tag attached. Determining the support structure is as important as defining the role and skill-set of the CIO.

Setting aside cost concerns, what professional investment experience does the CIO need to offer to trustees and the plan sponsor? The specification is frequently to have a senior investor with a significant track record and experience of multi asset portfolios, but this is often the hardest skill-set to find in our age of specialist fund management.

The reason for the scarcity is clear. The shift away from balanced fund pension mandates over a decade ago and the subsequent move to core and specialist mandates diminished the career track for the fund manager who had the experience of running portfolios across a range of equity and fixed income assets. Many senior investors with multi asset experience went into the hedge fund sector lured by global macro funds. Others moved to run portfolios within wealth management businesses. A successful candidate should also have a fluent understanding of derivatives, current trends in the alternatives sector and how that is relevant for the pension fund sector.

On top of these come the skills of conviction and advocacy. "It is critical to have the ability to be pro-active and directive on occasion, but still to implement the trustees' wishes and sustain their support," says Nicola Ralston, senior consultant and co founder of investment consultancy, Pi Rho. "Many good investors struggle with the need to persuade and inform, which is an essential part of the role in most cases."

A CIO role does have considerable appeal, however, and a senior investor with meaningful experience will appreciate taking a holistic view of investments and having decision-making authority. Any CIO role specification needs some substantial meaningful metrics built into it, which will measure the short-term and medium-term success in the role. The danger for many pension funds is that some potential candidates might see a pension fund as a safe harbour of employment without the short-term commercial pressures of the third-party asset management sector. The challenge, however, is to set meaningful and fair performance targets and rewarding successful outcomes. The alignment of interests is vital. This will not be a formulaic process, monitoring the qualitative is as important as the quantitative. Can this individual communicate bad news to trustees? In any interaction, can they make complex investment language digestible to trustees? From experience of working with pension funds it is worthwhile testing this during the recruitment process and including some formal presentation to the trustees which challenges the candidates' interest in the role and their ability to explain complex ideas and bring them to a conclusion with the trustees.

What about some of the pension funds with AUM below the critical level of £3-5bn? Is there a ‘halfway house' that could access investment resource but also be affordable and valuable to the fund? Hitherto, industry discussion has been around the concept and application of full time CIOs. Is there a place for a part time CIO? It might suit smaller funds and certainly it would be a powerful lightning rod for trustees decision making. The plan sponsor would be employing a senior investor to provide an independent high-level view to enable trustees to make a timely decision free from the constraints of investment consultant house views. As Mark Baker, a senior investment consultant with 25 years experience of advising pension schemes puts it: "The need is for an individual who can ensure the trustees focus on the key issues, can give the trustees confidence and empower them to make the important decisions. Just one timely and effective decision can cover the cost one hundred times over."

Smaller pension funds have many calls on their governance budget and their time. Recruiting investment skill is one pressure on their long inventory of action points. A timely, effective investment decision driven through by a CIO could cover the costs many times over. So in any recruitment exercise it is important not to confuse cost with value. Ralston concludes: "Trustees should avoid the trap of seeking a single magic bullet, be it a CIO or fiduciary management. They need to think about how and why it will work for them, and whether they also need to make changes to the way they - and staff - operate to ensure radical solutions deliver the hoped-for outcome."

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