Pension Group Aims to Simplify Performance Measurement, Attribution, and Risk

(October 20, 2011) — The UK’s National Association of Pension Funds (NAPF) is publishing a new guide to help trustees and pension fund managers better understand performance measurement, attribution, and risk analysis.

The guide is aimed at assessing the fundamentals of pension funds’ performance, NAPF said. “Performance is a core factor for trustees and pension managers, and pension funds expend a lot of time and effort striving for the best results,” Joanne Segars, Chief Executive of the NAPF, said in a statement. “In today’s economically and financially challenging climate the pressure to secure the best possible return from assets is greater than ever. So we are very pleased to make this made simple available to trustees and pension fund managers.”

According to the group, performance measurement allows trustees and pension fund managers to understand whether investment objectives are being met. Furthermore, it helps measure whether the investment managers are achieving their targets. NAPF stated: “Attribution analysis permits trustees to understand why a pension fund’s return is different from the fund’s benchmark, and helps assess whether relative performance is due to chance or skill. And risk analysis enables trustees to consider the risks associated with the fund’s returns.”

Commenting on the guide — produced and sponsored by JP Morgan — Benjie Fraser, Practice Lead, EMEA, Pensions and Endowments at JP Morgan, Worldwide Securities Services, said: “We are extremely proud to be associated with this new NAPF guide. The guide provides a vital tool for pension funds. The need for transparency around pension fund performance is key in today’s market.”

Last year, a report from financial market researcher Finadium revealed that while global custodians remain the largest vendors of performance measurement services to institutional investors, “advances in technology” have allowed consultants to compete more effectively with custody banks in reporting performance results for their clients.

Performance measurement is a critical part of the investment management process for institutions and asset managers, the report said. With institutional clients demanding increased granularity and transparency across asset classes, fueled in the US partly by the passage of the Employee Retirement Income Security Act (”ERISA”) in 1974 that compelled plans to disclose liabilities and funded status, a complete view of analytics, attribution, and risk exposures has become an essential part of performance reporting, Finadium noted. Growing interest in outsourced arrangements has resulted in an array of vendors, including custodians, consultants, independent technology firms, spin-offs of asset managers and a variety of combinations of these firms. “To meet client demand, consulting firms either developed performance capabilities internally or sought a performance vendor solution,” wrote co-authors Josh Galper, Finandium’s managing principal, and James McCann, senior consultant, in “The State of Performance Measurement for Institutions and Asset Managers.”

To compile the study, Galper and McCann targeted the investment performance capabilities of the largest US consulting firms overseeing about $14 trillion or more than 75% of the assets of 8,700 US institutional investors. The study found that while 55% of the top 40 consultants use internally developed and maintained performance measurement processes, 45% use services from outside providers.