More boards and investment committees that oversee defined benefit pension plans are considering investment delegation, also called investment outsourcing, as institutional funds continue to be battered by volatile equity markets and low interest rates, a survey by HR consultancy Mercer found.
Mercer’s survey was conducted in November 2011 among 100 U.S. organizations with institutional funds (57 corporations, 25 endowments, foundations and hospital systems, and 18 professional organizations and government bodies). Among the findings, 41 percent of respondents with assets below $500 million were considering investment outsourcing and 31 percent of those surveyed with assets in the $501 million to $1 billion range were considering such delegation.
A major reason for delegating some or all fiduciary responsibility for investment decisions relates to the need for speed and sophisticated decision-making in a volatile, fast-moving market environment.
Delegating fiduciary responsibility for
investment decisions relates to the need for
speed and sophisticated decision-making.
Some 27 percent of respondents believed that they had missed investment opportunities because of the time it takes to make or implement decisions, a 6 percent increase from a similar survey that Mercer conducted in June 2010. The largest impediments to delay in decision-making have been market volatility (26 percent) and not enough expertise (20 percent). The largest impediments to executing asset allocation and manager changes have been insufficient staff (18 percent) and market volatility (15 percent).
Delayed Investment Decisions
As market conditions continue to be challenging, one-third of respondents take more than three months to make a decision on asset allocation or fund manager changes and 11 percent take six months to a year. Lack of speed of execution, once a decision has been taken, compounds the problem. Nearly half the respondents (44 percent) take from one to three months to execute asset allocation or manager changes. One in five (21 percent) take more than three months to execute a decision.
For pension plan sponsors, 2012 looks to be a challenging year in which there is increasing pressure for speed and quality of investment decision-making. Faced with major pension deficits and the requirements of the Pension Protection Act, many major companies have announced significant increases in planned contributions to pension plans. Mercer expects to see additional announcements of large cash contributions to plans throughout 2012 as companies file their form I0-Ks, and it expects that for many this burdensome cash contribution requirement will carry into 2013.
Lack of Staff
Half of the institutions surveyed had one or no full-time staff managing investments, and 89 percent of the respondents had no plans to change staffing levels in 2012.
“We believe the trend to investment outsourcing will accelerate due to a combination of factors: volatile market conditions, the desire to take faster and more considered investment decisions and the challenge of staffing to adequately monitor performance and risk in real time,” said Tom Murphy, U.S. head of fiduciary management at Mercer.
“In the corporate sector, companies are facing a dramatic increase in balance sheet deficits in 2012 and beyond, increased income statement expense and a sizeable increase in cash contributions to their pension plans,” Murphy observed. “For endowments, foundations and hospitals, the problem is often the complexity of many investment decisions and a lack of resources. Given these factors, a delegated option should look very attractive to a growing number of boards and investment committees.”
Investment Management Outsourcing Survey
Nearly half of U.S. pension managers (47 percent) said their organization will evaluate an outsourced approach to investment management when they next make a change. Of those organizations open to evaluating outsourcing, 43 percent said they plan to issue a request for proposal for these services by the end of 2013. Larger plans expressed a significant interest—of the plans with more than $300 million in assets, 41 percent said they would evaluate an outsourced model.
The August 2011 poll by SEI, an investment management firm, was completed by 106 U.S. pension executives overseeing assets ranging in size from $25 million to over $1 billion. Of the respondents, 49 percent oversee more than $300 million in assets. None of the respondents is an institutional client of SEI.
Defined Benefit Pension Plan Administration: Will Outsourcing Work for You?, Milliman, January 2012
Pension Funding Volatility Remains Top Priority, SHRM Online Benefits, February 2012
Five Key Pension Risk Management Tips, SHRM Online Benefits, January 2012
CFO Survey: Continued Volatility Will Alter Pension Risk Management, SHRM Online Benefits, December 2011
Risk-Management Q&As for HR Professionals Who Oversee Pension Plans, SHRM Online Benefits, November 2011
More Pensions Turn to 'Alternative' Investments, SHRM Online Benefits, September 2011
SHRM Online Benefits Discipline
SHRM Online Retirement Plans Resource Page