In this month’s Off The Record we asked you about the investment decision process within the pension fund. Who makes the decisions and what are the processes that inform these strategic choices. And perhaps more importantly, how do you evaluate whether you are making the right investment choices?
To start, we asked you whether you used asset managers solely on a third party basis. It turns out that this is the majority approach with 64% responding positively. Just over 20% of funds say they only employ an in-house team.
For the most part this appears to be an either/or question. Only 12% say they opt for a hybrid in-house/external operation. Those that do go hybrid seem to be in the testing stages, or are running specialist strategies, with the tendency to manage over 95% of their assets in-house with a small portion farmed out to managers.
Reassuringly, more than two-thirds of funds have an investment committee with the number of members on the committees rising to as high as nine. Most appear to include a couple of board members, the general manager of the fund and a couple of external advisers/investment professionals.
In terms of the regularity of meetings for these committees, however… well it would seem they tend to occur on the basis of necessity. A solitary fund says internal meetings happen on a daily basis, while a handful note a weekly or monthly schedule. Just under a third of schemes say they carry out in-house strategic and tactical reviews on a quarterly basis.
Externally, the vast majority of plans also test their strategies and tactical allocations with an adviser every three months, with a couple of rare exceptions checking on a more regular basis.
On average, the investment team has formal meetings with the trustees every quarter, although some funds get together twice a year, while others opt for a monthly pow-wow.
By and large, pension funds find these meetings useful with 61% lauding their benefits, although 11% do admit that they gain scant reward from the get-togethers.
Suggested improvements include better education for non- investment professionals and more foresight and long-term thinking.
One manager wants to keep the focus on the money, noting an emphatic desire for “More concentration on the performance of the investment!”
The question of a lack of understanding on the part of trustees or board members is nonetheless a real concern, with one in five funds saying that this can hamper investment decisions.
This is not to say that pension funds are against the lay principle – far from it, as one manager notes: “By their nature investment decisions are complex – specialist investment managers get decisions wrong. Even so, our trustees take a keen interest in investment issues and are able to make informed decisions. They attend investment seminars where possible.”
Another scheme reminds us that pension fund decisions do not revolve solely around an investment axis: “The board would be better at investment decisions if it was made up of investment professionals, but it would be less good at other pension decisions. Remember that it is there to represent and protect the members’ interests, something which investment professionals might be less good at.”
So, does this lack of professionalism lead to any short-term/quick fix approaches on investment?
Well, yes, most of you (75%) seem to think it can do – a somewhat worrying number it seems to Off the Record, and maybe not something that most funds would normally admit to. But then that’s what we’re here for!
It seems pertinent to look closely at a number of the responses here, which shed some light on the problem.
One manager laments the overarching influence of the benchmark in today’s pensions arena. Benchmarking is invading every aspect of our life. Everybody pretends to be looking at the long-term perspective, while always considering the short-term benchmarks. On the other hand, long-term is the addition of short-term periods...”.
A quandary indeed, and backed up by another scheme chief’s thoughts: “One of the most difficult tasks in evaluating managers is not to forget the long-term perspective, while giving the right attention to the current returns. You don’t want your manager to (continue to) underperform, but where do you draw the line between terminating and keeping the confidence, especially if you have a five year horizon for the mandate?”
Food for thought certainly.
In response, a number of schemes have tried to balance up the picture, as one notes: “It is too easy to sit back and look at the monthly or quarterly figures and make knee jerk reactions, particularly in a falling market. The system we have in place allows us to see the current picture but also look to the longer term when considering the economic factors and trends.”
As a result there is not one dissenter from the next question as to whether pension schemes would like to see trustee/board members have a greater knowledge of investment issues.
Surprising then that according to your responses there is no formal qualification required by trustee/board members in any of the local pension fund markets in Europe!
Intriguingly, opinion is evenly divided as to whether introduction of such a qualification would be a help or hindrance.
Many argue that if this was carried out an on a voluntary basis it might have some value. Most shy away from any mandatory qualification though, as one fund remarks: “Yes, provided it covers basics only. We do not all of us need to be experts!”
Nevertheless, the advent of information technology is helping, as 58% of you point out. Information now arrives in a more timely fashion to the decision takers and thus the time scale for response to investment questions has speeded up.
The greatest number of funds note that on average the investment board takes around a fortnight to respond to investment questions – although some react much faster than this.
So, where do the consultants fit in? Forty-seven per cent of you respond that you do use them on the investment side.
How useful are they? Well, just over half of the respondents say they are beneficial on questions of the investment process and its implementation, while 41% come out in their favour as a source of trustee advice and assistance. Perhaps some work to be done there then…
One of the problems might be the lack of any formal method of evaluating advisers – only a single respondent says they have any such instrument in place. But as one scheme adds: “We have not found a good measurement yet. We are looking into this matter.”
So on to performance measurers, which 52% of you claim to use to evaluate the quality of the fund’s investment decisions and risk.
A number of schemes note that this takes the form of quarterly reports to the board and daily reports to staff, although few claim to evaluate this data thoroughly in retrospect.
As one pension scheme, notes: “The value of our consultants is the comfort level, outside viewpoint, second pair of eyes and due diligence/prudent expert fiduciary shield they provide our board. If our board is happy, the consultant is doing its job.”
No comments yet