Avida International’s Sally Bridgeland explains what trustees and pension fund committees need to be mindful of if they decide to move their investments in-house.
Action points
Set out the desired benefits of having an in-house team: use these to measure success and benchmark against external alternatives.
Be clear about how you expect your resourcing strategy to change over time.
Address career progression and remuneration issues: manage expectations up front.
As defined benefit pension funds mature, trustees face many challenges. One of the hardest to address is how to resource the investment side of the operation.
Once an in-house team is in place, making sure that it continues to be aligned with the trustees’ needs poses further challenges.
Looking at the assets which grow the balance sheet, asset classes and active strategies are having to look wider to find returns.
Whether through diversification or through explicit liability hedging, the range of skills needed to manage risk is also wider than ever, and the scale required to operate at a cost-effective level is ever-increasing.
On top of this, the team will almost certainly need relationship, joint venture and supplier management skills.
A clear purpose
So how should you measure success and oversee the team to ensure that it evolves and remains fit for purpose?
An in-house investment team may feel like a square peg in a round hole if their skillset is not well understood
The first step is to be clear about what success means and ensure that it is understood by all the stakeholders – including the trustees, sponsoring employer and the advisers.
It is all too easy for an in-house team to want to be all things to all people if they lack this clarity, leading them to spend too much time responding to demands rather than taking the lead.
An in-house investment team may feel like a square peg in a round hole if their skillset is not well understood.
The compliance and regulatory demands of an investment operation, the mix of skill and luck needed to deliver financial targets, the timeframe for measuring success, the jargon, the systems, the apparent complexity: all of these aspects may sit uncomfortably within the sponsor’s business culture.
This can manifest itself as a proliferation of management information and reporting – another drain on the team’s time.
Having a clear purpose and success measures for the internal team allows for periodic benchmarking against external alternatives.
Being explicit about the preferred ‘make, buy or collaborate’ policy can also help give confidence and stability as the pension fund evolves.
Staff development
As growth investments succeed in eliminating a deficit, they will be switched to lower risk assets. For the lower risk assets, success will mean that the fund’s cash flows will steadily run off and its time horizon reduces. Individuals may become victims of their own successes.
Aligning reward and personal development opportunities with the likely strategic changes over time can be helpful, not only in setting out a clear direction of travel for the individuals, but also for recruiting the right people and designing the right remuneration packages.
Before an in-house team is in place, it is therefore essential for those who are building it to envisage and articulate what success might look like.
There is no right answer, but, as with any business venture, this is about more than cost. The culture and skills of the pension fund sponsor’s business, its desire to take risk and its own attitude towards the ‘make, buy or collaborate’ issue is a good place to start.
Sally Bridgeland is senior adviser at consultancy Avida International
