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Newsmakers

SEI Poll: Investment Outsourcing Among Corporate Pensions to Double

The use of a fiduciary manager by corporate pension plan sponsors may double over the next five years, according to a poll by SEI.

(June 28, 2012) — Investment outsourcing by pension plan sponsors may likely double over the next five years as plan sponsors seek more expertise and faster execution, according to a poll conducted by SEI.

Of the poll participants who are not using a fiduciary manager, 29% said they would likely consider a change to this model within the next five years, potentially more than doubling the use of an outsourced fiduciary manager model by corporate pension plan sponsors by 2017. “As pension plan management becomes more complex, we are seeing a growing demand in the marketplace for outsourced fiduciary management services,” said Kevin Matthews, vice president and managing director at SEI’s Institutional Group. “Working with a fiduciary manager allows plan sponsors to allocate various levels of discretion to an investment partner, whether it be manager research, selection and oversight, or the added layer of discretion over asset allocation decisions.”

According to the poll, the top three drivers for investment outsourcing include:

1. Expert advice across all markets

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2. Faster execution on market changes

3. Delegation of tactical decisions to increase focus on strategy

SEI conducted the poll of 50 corporate defined benefit plan sponsors to determine their organizations’ current and future use of a fiduciary manager and their top reasons for outsourcing the investment management of pension plan assets.

When asked out the reasons for investment outsourcing among pensions, investment heads contacted by aiCIO often cite that asset owners are generally not “natural investors.” In other words, corporate pension plan sponsors are responsible for a large pool of money to protect, but they are often not the most skillful with more complex strategies — such as liability-driven investing and risk parity. Outsourcing, then, is a natural evolution of the industry, CIOs often say.

SEI’s study contrasts with a survey conducted by Russell Investments in March, which noted that large funds are shunning outsourced investment. While fiduciary managers and consultants offering investment outsourcing are picking up more business from small to mid-size pension fund investors, they are failing to take ultimate control of the larger funds, Russell’s research found. By the end of 2011, the number of smaller schemes employing a fiduciary manager or outsourcing expert had grown from 15% to 26% since 2009, Russell Investments said in its governance survey.

Related data:aiCIO Investment Outsourcing Survey

Home > News > Newsmakers > Illinois Pension Signals Lower Return Target
Newsmakers

Illinois Pension Signals Lower Return Target

The executive director of the $37 billion Teachers’ Retirement System of the State of Illinois has hinted that the plan may lower its assumed rate of return.

(June 28, 2012) — The $37 billion Teachers’ Retirement System of the State of Illinois (TRSI) may employ a lower expected rate of return when it calculates its liabilities, the chief of the plan suggested in an interview with the Wall Street Journal.

“My guess is that [the rate of return] comes down,” Richard Ingram, executive director of TRSI, told the WSJ. “We are not immune from financial reality. We are looking at the same numbers as everyone else.”

TRSI uses a discount rate of 8.5%, permitted under current Governmental Accounting Standards Board (GASB) rules but one of the highest relied on by US public pensions. Lowering that figure even slightly would cause a large spike in liabilities for a plan that is already deeply underfunded. As of June 30, 2011, the plan was 46% funded.

While over the past 30 years TRSI earned an annualized rate of return of 9.3%, over the past decade it has on average fallen short of that benchmark. “The question is whether that is a good number for the next 30 years,” said Ingram. “That is what we are wrestling with right now.”

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As a national debate surges over whether public pensions are accurately computing their future liabilities, early this week the GASB voted to approve new accounting standards that could cause a jump in public pension underfunding. Although funds that the GASB deems sufficiently funded can continue to base their liability assumptions on an estimated rate of return of their choosing, insufficiently funded plans would have to use a discount rate of between 3% and 4%. The new standards, should the GASB not decide in the meantime to relax them, would come into effect over a period of two years.

Meanwhile, this month a study by the Pew Center on the States found that the pension and benefit obligations of state pension plans faced a staggering $1.38 trillion unfunded liability. The Pew survey relies on data from the 2010 fiscal year—the latest available but still outdated—so the true figure may be higher or lower than that.

Although public pension funds struggle with underfunding issues and do the best with what they resources they have, there are pockets of excellence throughout. The latest issue of aiCIO magazine profiled the two men in charge of the San Bernardino County Employees’ Retirement Association, who are managing the task of paying $8 billion in benefits with only $6 billion in assets. To read “Bright Lights, Big Country,” click here.

To read Ingram’s interview with the WSJ, click here.

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