Mercer’s Michael Kinney argues that trustees need a delegated solution provided via an implemented consulting partnership

Pension schemes’ investment arrangements are more complex than ever and the obligation placed upon trustees to demonstrate strong governance is becoming increasingly burdensome. Yet trustees possess only a limited amount of the time, resources and expertise it takes to manage their schemes effectively. Our clients tell us that they are often starved of the level of governance required to strategise, execute and monitor investment arrangements.* They need precisely the sort of delegated solution provided by an implemented consulting partnership.

Implemented consulting can be part of a delegated solution that runs the gamut of the decisions that a board of trustees needs to take. This can include not only the manager structure and manager selection decisions, but also the formulation of the strategic asset allocation and subsequent dynamic de-risking programme. Thus, pension schemes that are considering an implemented solution have the potential for realising a fourfold enhancement of their operation: from improved governance to better strategic focus, increased efficiency and − as is so important in today’s unprecedented financial climate − the cost certainty of full service under a single fee.

Clear benefits

Improved governance is achieved as the delegating of investment decisions (and the execution of those decisions) allows trustees to be confident that sufficient time and resources are being allocated to the oversight of a scheme. There are clear benefits to a trustee board functioning in the same way as the board of any corporation, setting the strategic direction, with day-to-day implementation and details such as contract negotiations and legal due diligence delegated to experienced professionals. This enables more complex investment arrangements to be put in place − with full transparency and appropriate knowledge and expertise − without the need for a commensurate increase in the trustees’ governance budget.

Focus is enhanced when trustees are able to dedicate the majority of their available time to setting the right investment strategy for their scheme. This matters because strategic asset allocation is the key driver of risk and return for any pension scheme. Yet some trustee boards find that non-strategic implementation issues – manager selection included – can be a disproportionate distraction from strategy issues. By delegating implementation issues, an implemented consulting arrangement can allow trustees to regain this focus, and hence form a clearer perspective on investment strategy.

Efficiency is also improved through an implemented solution. The challenge for many trustee boards is not only the taking of a decision, but also the execution of that decision. Implementation of decisions involves many tasks – negotiation of contracts and fees, compliance and operational due diligence, transition of assets – as well as getting authorised signatories to sign. A delegated consultant with the necessary infrastructure can take responsibility for these duties using its own operational infrastructure. We’ve learned that trustees need to be able to execute our investment manager research ideas quickly and effectively in order to reap the benefits, and yet many trustees simply do not meet regularly enough to take advantage of the advice. Implemented consulting can overcome this functional barrier.

Greater cost certainty is, of course, a crucial byproduct of an implemented solution, providing as it does a comprehensive service under one fee, which covers all manager selection and day-to-day monitoring costs, no matter how many manager changes are needed. (Indeed, how often do trustees set a fee budget in place for the investment work that they expect for the year, only to have to replace, for example, an equity manager unexpectedly?) In fact, an implemented solution can extend, within its single fee, to all the key investment services that a wellgoverned pension scheme requires, such as triennial investment strategy review, regular strategic advice and ongoing reporting.

The right partner

Choosing the right partner for an implemented consulting arrangement is the key to achieving this fourfold advantage, and so it’s vital that the trustees use an implemented investment solution that will improve the allocation of the investment governance budget. This calls for key strengths on the part of an implemented solutions provider.

For a start, that means it must possess leading investment expertise, the capabilities to assist with every aspect of institutional investing − from strategy, structure and implementation to ongoing portfolio management − with a robust set of tools and processes. Global depth in consulting and world-class manager research is equally important, but beyond even that − and especially for larger schemes looking to delegate the management of specific portfolios − it’s worth asking if the provider can construct bespoke portfolios that meet particular strategic objectives.

Then there’s the issue of accelerated execution. A major challenge for trustees is effective post-decision execution. Delegating that implementation means relying on a consultant’s infrastructure to accelerate the time from decision to execution, enabling trustees to react to opportunities far more quickly than they would normally. Therefore, is the consultant’s infrastructure tried and tested? How many years of proven experience does the consultant bring to the table through its track record of successful work for trustees, corporations, foundations, and endowments worldwide? And, finally, does it offer a flexible service that can be packaged under one transparent fee yet still retain the capacity to adapt, shift and grow along with the evolving strategic needs of the trustees and the organisation? From our perspective at Mercer,it’s clear that different pension schemes will have different needs that require this flexibility. For example, a mid-sized UK pension scheme we worked with had been investing all its assets with the same manager for more than 10 years, with very little internal resources and infrequent trustee meetings. The trustees were keen to conduct a strategy review but were put off by the upfront costs. Our implemented consulting approach resulted in an asset-based fee for all investment services, including a strategic review, along with a diversified manager structure and more efficient governance.

Then there was the very large UK pension scheme with a good deal of in-house resources and expertise, although not in the alternative investment realm, and with limited ability to add additional in-house resources. In seeking to allocate assets to a broad basket of alternative assets, the trustees turned to Mercer for a bespoke implemented consulting solution. This resulted in flexible access to alternative asset classes via a dedicated client account established within our operational infrastructure. In addition, we were able to take on operational due diligence and the negotiation of manager legal contracts. The reduction in the workload of the in-house pension team was complemented by the assurance that complex decisions would be taken by suitably qualified professionals.

At the end of the day then, an implemented consulting arrangement must do more than merely afford trustees the convenience of delegation. It must exemplify the depth of expertise, flexibility, efficiency and governance that will best serve the strategy of any pension scheme as it faces an ever more complex fiscal future.