Nick Lewis Director, Investment Consulting
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10-second summary
When you want to get from A to B, what really matters is the engine, not the slick paint job or go-faster stripes. Similarly, when designing an investment portfolio, what's going to help you reach your endgame is taking long-term strategic decisions, not spending hours scrutinising quarterly market moves. At Redington, we believe trustees should ‘focus on what matters’, i.e. the decisions that have the greatest impact on member outcomes. Trustees typically have limited governance bandwidth, so they must utilise it efficiently. We advise our clients under a number of governance structures to help them manage this constraint.
How do we approach operational efficiency at Redington?
As investment consultants, our objective is to help our clients achieve the best possible member outcomes. To do this, we believe trustees should focus their time and effort on the decisions that can have the largest impact.
However, we recognise that every client is different, and therefore their level of expertise and capacity to dedicate to investment matters will vary. So it’s important that clients adopt a governance structure and level of delegation that suits their requirements.
The diagram below illustrates the spectrum of investment decisions, with the more operational-based ones, such as cashflow management, on the left and the more strategic ones, such as setting an endgame objective, on the right.
In general, we advise our clients to implement a governance structure that allows trustees to retain control of the elements on the right-hand side – since these decisions are likely to have the greatest impact on member outcomes – and delegate the decisions on the left-hand side, where appropriate.
Pitstop 6: Operational Efficiency Keeping your eyes on the road
For clients that delegate some of these elements, we typically advise they adopt one of four main governance structures:
In-house team
Implementation manager
Fiduciary manager
Outsourced Chief Investment Officer (OCIO)
What is it?
Retaining investment function within the scheme’s organisation rather than outsourcing to a third party.
Outsourcing the scheme’s implementation function (such as managing asset transitions, hedge rebalancing and implementing pre-agreed triggers) to a third party, typically an asset manager.
Outsourcing the scheme’s investment function and day-to-day management to an asset manager.
Full or partial outsourcing of a scheme’s investment function to a third party, typically an asset manager. Under this structure, the scheme usually retains control over the strategic asset allocation.
Trustees maintain strategic control
Yes
Varies
Timely execution
Yes, likely
Governance burden on trustees
Medium
Low
Conflict of interest
No
Potentially
Transparency
High
Fees
Redington provide ongoing oversight of our Fiduciary Manager. The Trustee takes a lot of comfort from knowing that all major strategy changes have gone through a process to be challenged by an independent investment expert. The Redington team have always worked in a really collaborative way with our manager but are also very happy to challenge them and suggest alternatives where appropriate.
One of the most governance-intensive parts of a pension scheme’s journey is agreeing when and how to de-risk. Trustees must react in a timely manner to market moves to take advantage of opportunities to transition towards their endgame and bank any gains. We often recommend our clients implement ‘de-risking triggers’ to allow for this. De-risking triggers require trustees (and any key stakeholders) to agree a pre-defined set of ‘triggers’ – usually tied to funding level or required return – upon which the scheme will choose to de-risk.
As well as creating alignment between key stakeholders up front (avoiding lengthy discussions and potentially missing opportunities to de-risk) we find that de-risking triggers help to remove emotion and behavioural biases from decision-making.
In order to work effectively, this type of structure typically requires at least some level of delegation – primarily in monitoring the position of the scheme versus the agreed triggers. This is an area where an implementation manager might be able to help.
How does this benefit our clients?
By delegating the responsibility of operational decisions and activities, trustees can spend less time debating the small stuff and more time on the areas that really matter – allowing them to achieve better member outcomes.