Irish Pensions Magazine Autumn 2013
14
T
here is a generous choice of investment
frameworks for pension fund trustees to consider
for the governance of their funds, whether defined
contribution or defined benefit. Along with my
colleagues in Verus, I have spent much of the past
three years studying the different types of Outsourced
Investing model that trustees can use. We have been
struck as much by the range of approaches that can be
taken, as by the extent to which this field has evolved
over the past few decades. Trustees sometimes feel
a little bewildered by the complexity of these choices.
I would hope, however, that some of the thoughts I
have gathered together here, might make addressing
questions about the right investment governance
framework a little more digestible.
Historical perspective
A glance backwards through Irish pension fund
history tells a story that helps to explain the various
governance models used.
1. The Beginning - Single Balanced Manager
As professional asset management gained a foothold
in pension fund investment in Ireland, the attraction for
trustees was the high level of return that appeared to
be available from people with expert access to high-
return assets such as equities. Insurance companies
had been the natural go-to people for typical pension
funds. But medium to large funds, at that stage almost
entirely defined benefit plans, began to see investment
managers, some of which were owned by insurance
companies, as the natural provider.
The competition for funds among investment houses
led to a growing interest in measuring the performance
of investment managers (and a painfully slow
improvement in the methods used to do this). The key
questions asked were about whether adequate returns
were achieved and whether better returns might have
been had elsewhere.
The natural stewards for this measurement and
monitoring were the investment consultants, a
function which commonly grew as an adjunct to the
actuarial consultancy role but became quite distinct
from it. Independent measurement of returns was
carried out by consultants, often in the form of peer
group comparisons. Manager selection was generally
advised by the same consultants, who then carried out
ongoing oversight of the investment managers for the
trustees.
Typically, at the early stages of this period of
development (in Ireland from the 1960s to the early
1980s), investment managers ran ‘balanced’ portfolios
covering all or most of the assets of the scheme. We
can refer to this as the Single Balanced Manager
approach.
2. Asset Allocation - Specialist Manager Approach
Techniques introduced by consultants to consider risk
in terms of liabilities led to asset allocation being done
under guidance of consultants.. The mandates issued
to investment managers changed, removing much of
the managers’ discretion in relation to asset allocation.
It was a short step from this to the introduction of
specialist mandates, where managers were hired
to manage a particular asset class or subset of an
asset class in which they were regarded as having a
particular skill. Trustees now had multiple managers
(sometimes two, sometimes a handful, but in the case
of some of the largest funds in the world, more than 60
managers directly contracted was not unheard of).The
resulting structure was somewhat unwieldy for smaller
funds but worked as a governance model for larger
funds. The investment consultant played the critical
role in policy formulation, asset allocation, manager
selection and review, and oversight of the investment
activities of the managers.
We can refer to this as the
Specialist Manager
approach
.
Sometimes consultants and trustees recognised that
specialist fragmentation was not economic but still
wanted to diversify managers. They assembled two
or more reasonably similar balanced managers to
compete in ‘real time’ among each other by managing
a portion of the fund. We call this the Split Manager
approach. Clearly, the consultant maintains an
oversight role where this governance model is used
Pension Fund Investment Governance - Real Choices for Trustees
by Ronan Smith
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