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Dorothee Franzen wrote Chapter 17 of this publication, on Pension Investment Governance, with John Ashcroft of JA Pension Consulting.
Dorothee Franzen writes in IPE Quest on successful provider searches.
Karin Roeloffs chaired this Financial Investigator roundtable on fiduciary business models.
In this article, published in Financial Investigator No. 1 2019, Paul Boerboom and Tim Juling look back on the development of fiduciary management.
In this article, published in Financial Investigator No. 7 2018, Paul Boerboom looks at ESG and impact investing via a real life case study from Uganda.
Karin Roeloffs joining Avida International as an Associate Partner was given attention in a press release:
This blog, by Bart Heenk, was first published on Mallowstreet.
If there is one thing pension funds can learn from the military it is that it is not the plan that matters and planning is everything. The army spends 80% of its time training and 20% in operations. This allows them to prevent crises before they become reality. Military planning is used to build agility in dealing with risks and war gaming is essential to build intellectual ‘memory muscle’. Pension funds can learn from this.
The financial crisis of 2008 has shown that all major risks were interrelated and most of us were ill-prepared and some took precisely the wrong decisions by panic selling in the depths of the crisis or halting rebalancing trades. When long-term capital market assumptions are based on long-term mean reversion of markets, one very bad decision in a crisis can have a substantial impact on these assumptions, to the extent of rendering them worthless. So, have we learnt our lessons from the financial crisis and are we better prepared now?
At a recent roundtable jointly organised by Strategia Worldwide1 and Avida International, senior pension fund executives and trustees discussed their biggest risks and how prepared they were for dealing with those risks. Risks mentioned ranged from cyber-crime and the associated reputational damage and inability to pay out pensions, to insufficient liquidity in the fund to simultaneously meet margin calls from derivatives counterparties and transfer requests related to pension freedoms following market turmoil.
Whilst most pension funds around the table admitted that they had done very little planning, some of the participants had run war gaming sessions in order to prepare the organisation for crises. They learnt not to focus on procedures or a manual (a plan) but on process (the planning). This is precisely what the military does. War gaming is essential to build the intellectual memory muscle to be ready in times of crises. One thing is certain: no plan survives first enemy contact. Or, in our pension fund language, a crisis is never exactly how it was anticipated. Consequently the value of war gaming is not in producing a plan but in the planning process itself. When a crisis hits, the organisation will have practiced so much that crucial issues like command structure, team composition and relationships, everyone’s roles and stakeholder communication have become second nature. This allows the organisation to focus on the essentials in a crisis, and act quickly and decisively. War gaming also has preventative benefits and can help identify those risks that can be mitigated already.
Interestingly, whilst this is something that is commonly practiced by corporates in, for example, the airline, petrochemical and extraction industries, their pension funds tend to be much less well prepared for crises. The financial crisis of 2008 was a fantastically valuable learning opportunity but unfortunately many trustee boards have largely forgotten the lessons partly as a result of changes in the composition of the board. Quite a few pension funds will have a crisis plan but if it is not regularly practiced these plans will prove to be of little value when a real crisis happens.
Strategia and Avida want to help pension funds to become better prepared for crises and are thinking of putting together a joint service proposition that entails war gaming sessions once or twice yearly, plus a SWAT team that is on standby for when the pension fund needs extra resources to deal with an eventuality. The idea being that most pension funds are resource constrained and do not have sufficient capacity to deal with an out of the ordinary situation.
This initiative will hopefully help pension funds to learn some very valuable lessons and prepare them better for the next crisis that will undoubtedly hit us one day.
1 Strategia Worldwide helps companies, investors and funds across many sectors protect value by taking a comprehensive approach to risk and then designing integrated strategies to manage them.
Pascal Hogenboom joining Avida International as an Associate Partner was given attention in a press release: Pascal Hogenboom joins Avida International.
This was covered in Financial Investigator, I&PE, Schade Magazine and Risk & Business & Claims.
In this article, published in Pensioen Bestuur & Management in September 2018, Peter Kolthof considers the changing role of fiduciary managers.
This blog, by Bart Heenk, was first published on Mallowstreet.
Investment decision making is difficult for even the most specialist investment managers. And they have clear and unambiguous benchmarks to measure the success of their decision-making against. They also have frequent, accurate and to the point information on how well they are doing versus their benchmarks.
Investment decision-making for trustee boards is even harder. Often their benchmarks are a combination of various – even conflicting – objectives. Closing the funding gap whilst keeping downside risk limited is one. Maximising sponsor contributions whilst keeping the covenant strong is another.
Don’t rely on reporting
To make matters worse, reporting is often incomplete, inconsistent and sometimes even inaccurate. There are various reasons for this: pension funds often get their reporting from external service suppliers, such as the actuary, custodian, investment adviser or fiduciary manager. These suppliers report on the specific service they provide, leaving the pension fund to put the pieces of the puzzle together.
But the suppliers may use different assumptions, different calculations and different source data. This can make putting the puzzle together an almost impossible task. The result is that pension funds spend more time on reconciling data than on analysing the information.
Some service providers, like fiduciary managers, offer to put the pieces of the puzzle together for the pension fund. This is helpful, but not a solution given the need to have information independently verified, particularly data coming from providers who have a commercial interest in presenting their data positively.
So how is a pension fund board to make investment decisions in these circumstances?
All participants in a recent roundtable organsied by Avida agreed on the need to take reporting back to the pension fund’s objectives. If the pension fund’s board has delegated investment decision-making within certain restrictions (whether risk-related or otherwise) to an investment committee, this means different reports should go to the IC and to the board, because the objectives of the IC and board will differ.
If the pension fund has an internal CIO to whom the IC has delegated some decision-making, it again calls for dedicated reporting for the CIO. Whilst this puts a burden on the infrastructure needed to produce all these reports, it is seen as essential to report back to each governance layer’s objectives.
See the bigger picture
The challenge is to restrict reporting to what is essential for board and committees, and this is where most pension funds have work to do. The more detailed the reporting, the more likely it is that the discussion is going to focus on the detail rather than the big picture. This is not a good use of the board’s time, whose focus should be on the big strategic issues.
Good reporting is also about finding the right balance between backward-looking and forward-looking information.
Backward-looking information is important to learn how previous decisions have impacted the financials; this includes the often overlooked need to assess what the impact of not taking decisions has been. Backward-looking information also helps with assessing how well your assumptions have worked out (eg, ‘Did interest rates rise as much as we expected them to?’).
Humility is healthy
Board members are often successful business people and they can have a tendency to become overconfident about their ability to predict where markets are going. Good reporting includes a comparison of predicted market moves with reality. This can result in healthy humility.
Providing good forward-looking information is another area where most pension funds have work to do. Assessing the impact of forward-looking scenarios is a very helpful method to narrow down the decision-making to which actions are acceptable and which are not. Whilst choosing scenarios will bring its own challenges, it is certainly a lot better to think about what might happen than to just expect that your (or the investment consultants’) assumptions will come true.
If that all sounds like hard work, bear in mind that the sponsor often has their own reporting demands on the pension fund and that regulatory reporting requirements will only increase in coming years. Pension fund investment decision-making truly does require hard work.
Bart Heenk comments in this blog on Mallowstreet by Sandra Wolf. Please note access is restricted to Mallowstreet members only.
Joanna Matthews will succeed Sarah Smart who leaves TPT Retirement Solutions (TPT) trustee board after eight years in the post – Professional Pensions.
Coverage of Sally’s Bridgeland’s appointment in Professional Pensions and I&PE
Stan Beckers joining Avida’s Advisory Board was given attention in a press release: Stan Beckers joins Avida International’s Advisory Board.
This was covered in I&PE, Financial Investigator, FondsNieuws and Investment Officer.
Bart Heenk and Sarah Smart consider the pros and cons of consolidating pension funds in this I&PE article.
Sarah Smart joining Avida was given attention in a press release: Sarah Smart joins Avida International
This was covered in:
Sally Bridgeland is interviewed on ‘Timing is everything: when to transition to an outsourced investment partner’ in this report from Clear Path Analysis.
Dorothee Franzen considers the difficulty of obtaining figures on funded pensions in Germany in I&PE’s Asset Management Guide 2018.
Bart Heenk comments on the potential regulation of investment advice in I&PE.
Bart Heenk explains why consultants should embrace scheme consolidation and how they can prepare for change in Pensions Expert.
Pension funds are consolidating. Bart Heenk considers the consequences for investment managers in I&PE.
Dorothee Franzen, Paul Boerboom and Peter Kolthof discuss the state of play of fiduciary management in I&PE.
Peter Kolthof chaired two Financial Investigator roundtables – one for providers and one for pension fund clients.
During the roundtables, the importance of soft factors (match in culture) next to hard results was stressed, as well as the continuous and independent evaluation of a fiduciary manager.
Bart Heenk talks about need for pension funds to be able to ask the right questions and arm themselves with sufficient expertise in relation to the asset management and investment consultant industry.
Read the full article on I&PE.
Regulating investment consultants will not solve the problem of ensuring pension investors are not losing out as a result of “murkiness and complexity” in the asset management and investment consultant industry, according to Bart Heenk.
Read the full article on I&PE.
Pension schemes should ensure they choose an independent adviser to assess their fiduciary manager’s performance, says Paul Boerboom.
Read the full article on I&PE.
Competition in the asset management sector is under scrutiny in the Financial Conduct Authority’s market study, but schemes can act now to get a better deal.
Read the full article on Pensions Expert.
By Susanna Rust on IPE, 10 May 2016
European pension funds need to make a “fundamental” behavioural and cultural shift to close “a yawning gap between the rhetoric of governance improvements of recent years and their reality on the ground”, according to a paper from The 300 Club, a group of investment professionals seeking to challenge mainstream investment practice and thinking.
Read the full article on IPE.
By Helen Morrissey on Professional Pensions, 9 May 2016
An interesting article on Professional Pensions (please note: the article is available after logging in on Professional Pensions).
Sally Bridgeland explains what trustees and pension fund committees need to be mindful of if they decide to move their investments in-house.
Read the full article on Pensions Expert.
By Sophia Grene, Financial Times, October 19, 2015
After a number of false starts, fiduciary management, where the day-to-day management of a pension scheme is outsourced, seems to be taking off in the UK market.
“My best guess is that, in five years, more than half of defined benefit [pension] assets will be run under some form of fiduciary management,” says Chris Ford, global head of investment at Towers Watson, the consultancy.
Fees and costs are controversial issues in the investment industry. Steven Charlton, Aisha Dudhia and Bart Heenk break down the key challenges in the discourse in the Autumn issues of Professional Investor. Bart Heenk: “The average pension fund trustee has limited insight into management fees and no idea of the true costs. This is largely because there is not attempt by the industry to provide clear and complete reporting. In fact most costs are, and remain, hidden unless you specifically ask for them.”
Read the full article here.
Sally Bridgeland: “Looking beyond the UK may provide lessons on how maturing pension funds can rework investment governance.”
Rembrandt’s self-portraits show an honest, unflattering, self-awareness as he aged. At a recent discussion event in London, large and maturity UK pension funds were candid in challenging their limitations and knowing their weaknesses. While UK pension funds still have long-term time horizons, these will diminish and will have a bearing on whether it is worthwhile establishing in-house resources to manage long-term illiquid investments.
Read the full article at I&PE.
The UK is a divided market for pension funds and while many argue it is well-regulated, others say it is overtly restrictive. In truth, both sides are right. The regulations put in place since Pensions Act 1995, the regulatory response to fraud at the Mirror Group pension fund following the death of Robert Maxwell in 1991, have succeeded in adverting further scandals but have arguable hastened the demise of defined benefit (DB) schemes.
To read the full article visit I&PE.
More and more pension funds are outsourcing part or all of their investment process to fiduciary managers or delegated CIOs, and in the Netherlands the majority of pension funds have already done so. Fiduciary management, solvency management, outsourced CI or delegated CIO, depending on how the various market participants label their service, can be very beneficial for defined benefit pension schemes that want or need a relatively sophisticated investment portfolio to meet their obligations.
Read the full article on I&PE.