Aon Hewitt Reveals a ‘Thumbs Up’ for Fiduciary Management

Fiduciary managers and outsourced CIOs have upped their game with 99% of their UK clients responding to an Aon Hewitt survey saying they were at least satisfied with their experience.

In the consultant’s survey last year, 87% said this was the case.

This year’s figures echo those in CIO’s 2014 Outsourced Chief Investment Officer (OCIO) Survey, which showed 100% of 191 international investors were at least satisfied with the service they received.

Some 26% of Aon Hewitt’s respondents from 93 UK pensions said their overall experience was excellent, with the largest proportion (56%) saying it was good. Just 21% said their funding level/performance was excellent, however, with 50% preferring to class it as good.

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For 2014, the consultants added “excellent” as a new category, making year-on-year comparisons difficult, but the level of respondents saying their funding level was unsatisfactory fell from 6% in 2013 to 3%.

The survey also showed a doubling in the level of uptake in fiduciary management over the last three years in the UK, with 37% of respondents having a fiduciary solution in place—up from 18% in 2011.

However, Aon Hewitt said trustee interaction with investment decisions had declined since the last survey, due to the uptake and satisfaction with their outsourcing arrangements. This point was flagged as a concern by experts talking to CIO for a major feature on outsourcing, published last year.

“People who outsource their investments need to realise that it’s not just a way of getting rid of a pension fund problem,” said Patrick Groenendijk, who led the Dutch €10 billion Vervoer Pension until February, when he joined Northern Trust’s OCIO business as a senior client investment officer. “It can never become someone else’s problem—and the regulator needs to know that you still understand all that is going on.”

Vervoer’s team grew from two to seven after appointing a fiduciary manager. Groenendijk beefed up risk controls and other functions the pension had never needed before just to better oversee the new processes being brought in to their investment strategy.

Investment staff at the California State Teachers’ Retirement System (CalSTRS) have kicked off a deep dive into the risk of shortfall: How it could happen, its likelihood, and strategies for making sure it doesn’t.

Pension reforms passed earlier this year set the $188 billion defined benefit plan on the path to full funding by 2046—assuming it earns 7.5% annual returns between now and then.

But what if it doesn’t?

CIO Chris Ailman posed that question to during the fund’s September 5 investment board meeting. A number of top asset managers and economists have predicted market returns below historic averages for the coming years, and CalSTRS has chosen to confront that possibility head-on.

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Shortfall Risk: The likelihood that a defined benefit pension system will not have enough money set aside to meet the pension obligations of its retirees in the future. —CalSTRS/PCA definition

Economic growth risk is the foremost factor determining asset returns, according to Pension Consulting Alliance (PCA), CalSTRS’ primary investment adviser. Weak growth brought on by cyclical recessions, another financial crisis, or geopolitical events poses the largest threat to the fund’s short-term returns. In turn, these draw-down events present the likeliest path to sub-7.5% returns over the long term and, taken to an extreme, plan insolvency.

“Mitigating short-term drawdown risk may improve the likelihood that the long-term pension reform measures will succeed,” PCA said in its presentation. But CalSTRS faces a “key tradeoff” in hedging. “Addressing major crisis risks could push the long-term expected rate of return lower,” the consultancy continued.

During the discussion, PCA Founder Allan Emkin, Ailman, and others expressed trepidation over equities’ long bull run and lofty valuations. According to research by Investment Officer Josh Diedesch, the US stock market’s price-to-earnings ratio (20) suggests annual returns below or barely surpassing the 7.5% threshold for the next five years.

As Ailman put it during his opening CIO report, the “US bull market is getting long in the tooth.”

During their next meeting in November, Ailman and the investment committee are set to undertake a close review of their options for mitigating drawdown risk amid the frothy market—and, by extension, the risk of a shortfall.

“I can’t think of another client that has addressed the topic this clearly before anything has happened. Your being ahead of the curve is incredible,” remarked Emkin, a veteran consultant.

CalSTRS_Shortfall

Source: PCA