This year's Pensions Age delegated consulting roundtable discussed the concept, use, appeal and structure of this new evolution in scheme advice. This service, now available to UK schemes, is supposed to offer extra flexibility and quicker reactions in asset allocation. Did the panel buy it?


Biographies
Chairman: Zuhair Mohammed joined Hewitt Associates in 2007 where he is chief executive of Delegated Consulting Services. Mohammed, a qualified actuary with more than 20 years' experience, has held a broad range of senior investment positions including head of investment consulting during his career. He has also advised a wide variety of pension schemes in the UK and Europe ranging from £5m to £15bn. He has developed a number of structures that allow pension schemes to adopt nimble, scalable and efficient investment strategies.

Panellist: Ian Bailey joined the investment team at Hewitt Associates in 2008 as a senior consultant. Before joining Hewitt, he spent 31 years in fund management working for BlackRock Investment Management and its predecessor companies in the UK. He has worked extensively with UK pension funds in both the private and public sector and was a trustee himself for 10 years. He has also been on the board of a UK life company.

Panellist: Zahir Fazal is a chartered accountant and works for BESTrustees, which he joined in June 2008. Previously he was a partner at Horwath Clark Whitehill where he established their highly successful Pensions Group in 1995. He has acted as engagement and audit partner for several large schemes for many years (including the J Sainsbury and ITV). Over the last few years he has focused on advising trustees on governance, risk and internal control issues and on the strength of employer's covenants.

Panellist: Steve Delo is chief executive of PAN governance, the independent trustee company and an independent trustee himself. He is also a former chairman of the Pensions Management Institute. Prior to his current role, which he assumed in January 2008, he ran a multi-management investment business called Escher Teams. He is a regular media commentator.

Panellist: Keith Webster is a partner in the award winning pensions team at city
law firm CMS Cameron McKenna. He provides a wide range of technical and strategic advice to pension scheme trustees and employers, as well as advising benefit consultants and product providers, with particular experience of investment related issues. He is a member of the Investment Sub-committee of the Association of Pension Lawyers, a Fellow of the Pensions Management Institute and holds a Diploma in International Employee Benefits.

Panellist: Matt Philpott is head of UK consultant relations at Franklin Templeton Investments, and is also responsible for overall consultant relations coordination outside the U.S., working closely with their product management, client service and sales teams. He has worked extensively with both traditional advisory and implemented consultants over the last five years, as well as having experience of working with multi- and fiduciary managers. Matt has 13 years' experience in investment management.


Delegation: stronger focus

With lay pension scheme trustees becoming ever more reliant on their advisers and professional counterparts when dealing with investment-related matters, the emergence of delegated consulting services in the UK has not come as much of a surprise to the pensions industry.

In fact, the idea that trustees can now hand over a set of investment goals to a third party, sit back and let them worry about the merits of allocating ten per cent of the scheme's diversification portfolio to Mongolian urban re-development projects is one whose time has definitely come.

However, making sense of what is on offer and picking the right service provider is tricky.

First of all, there's no track record here in the UK that schemes can use as a general reference point. Then there's the question of responsibility.

Will trustees be washing their hands and be able to blame someone else when things go wrong, or handing over their precious assets and effectively losing control of them for a set period of time? And what about the sponsor's role in all this delegation?

Pensions Age, in association with Hewitt Associates, recently staged a roundtable on delegated consulting to try to get to the bottom of some of these crucial issues.
With the panel consisting of parties on both sides of the fence (see biographies on page 54), the discussion managed to cover and clarify some of the more difficult issues in this new type of governance model.

Definition
Defining the difference between the delegated consulting service and the traditional advice model was first on the menu for the panel, with the chairman, Zuhair Mohammed, asking how this evolutionary development would operate in practice.

Steve Delo described it as a "sea change" which would present a new set of challenges for trustees.

"Investment consulting has been about providing recommendations but not taking decisions," he said.

"Delegated consulting is going that step further, by using the consulting resources that the trustees have to take the decisions with some sort of objective in mind - and being accountable for those decisions."

He also saw it as a way of "plugging gaps" in the current scheme model. At the moment, the vast majority of trustees have no access to any real-time evaluation of markets or tactical decision-making to try to improve outcomes.

But with delegated consulting, an avenue to reach far more pro-active, objective and focused decisions -which can better meet trustees' objectives - is suddenly opened up.

Keith Webster pointed out that consultants have always produced a shortlist of fund managers for a pension scheme to choose from anyway, so perhaps an element of delegation had always taken place, although it had never been formally acknowledged by anybody.

Ian Bailey agreed, saying that delegated consulting could be viewed as a "natural progression" from the established advice model, but it was far more than just a subtle alteration.

"One of the real issues for delegated consulting is that there is a whole lot of noise and wooliness around what it does and does not involve," said Bailey. "It should be different, it involves taking decisions, not something consultants have traditionally done. It should be about taking responsibility for delivering the right results for schemes."

The concept of shifting accountability was one that caused some concern for both Zahir Fazal and Matthew Philpott.

Philpott queried whether there was a possible conflict of interest when it came to target setting for an investment plan: would the trustees still be in control of laying out the targets for the scheme?

And if they were to take advice on that as they would be expected to, then where would that be coming from? Would there be a potential problem if it was the actual delegated consultant who helped set the targets?

In response, Bailey pointed out that the transparency that comes naturally from setting a funding target to meet the scheme's needs would ensure that, for example, targets designed so that consultants could meet them, rather than scheme specific ones, should not be possible.

There was unanimous agreement that the amount of accountability passed on to consultants would vary widely, with delegated consulting, along with its fund management cousin fiduciary management, being better viewed as umbrella terms for services which pitch themselves at different levels when it comes to passing the buck.

This diversity, along with schemes' ability to tailor agreements which leave them happy with how much control they can and cannot concede, would also mean that any fears of a cartel-like conspiracy on prices or asset allocation by providers would, hopefully, be unfounded.

Flexibility
The 'nimbleness' that schemes could gain by using a delegated consultant was praised by the panel, with Bailey highlighting its importance in modern day asset management.

"In the traditional approach to investment consulting, trustees may only have moved their assets every three years, and didn't take into account what was happening in the markets," he said.

"Strategy bore no resemblance to the realities of the markets and was only focussed on the actuaries' assumptions of what the returns would be. Delegated consulting can help get trustees closer to what's really happening in markets and the fact that things change on a regular basis. If you take the simple example of having a single fund manager recommended to you by your consultant, why not just appoint him straight away and get things moving that much faster?"

Philpott agreed, adding that adopting a more hands-on consultant would allow schemes to be able to deal with crisis management: "What if a team walks out or a market drops by 50 per cent?" he asked. "The nimbleness gives you comfort that it is being addressed. It's nice to have that option."

Delo suggested that the current economic crisis may well have been the catalyst for delegated consulting. Many trustees, he said, have probably found themselves looking back ruefully and wishing they had "bailed out of equities two years ago or moved to buyout when the opportunity was there". But in order to avoid a repetition of those sorts of mistakes, and to eventually move to buyout, a lot of "cute and timely" decisions will have to be taken.

A considerable weight would be lifted from trustees shoulders as well, argued Webster.
"Trustees have not been able to take a long-term view and be nimble with tactical shifts historically, often because they are limited by their operational ability," he said. "In some cases they may have been concerned that they need regulatory permission to decide to take short-term tactical decisions, but the operational restrictions are more of an issue.

"Delegated consulting offers a route to achieve the nimbleness without scheme trustees having to call the market," he said.

However, Fazal warned that the flexibility given to consultants or managers would have to be set within sensible parameters from the start. Otherwise there could be a danger that the field in which they could operate would be so wide that monitoring activity would be virtually impossible for trustees.

Role of the sponsor
Having had first hand experience of poor examples of trustee-employer communication, Fazal stressed the need for the employer to be firmly kept in the loop on all investment matters. Alienating the sponsor even further, intentionally or not, through the use of a delegated consultant was something to watch for.

"We're all agreed that it's the trustees' responsibility to set the objectives (for the investment plan), but they need the input of the employer as well, we shouldn't forget that Both the state of the covenant and where the employer is coming from needs to come into the mix as well," he said.

"Trustees are required to consult with their employers over investment strategy - I'm not convinced that happens very often in a meaningful way. An employer in lots of cases is picking up the tab for an investment strategy and they don't even know what it is."

Webster concurred, adding that this state of affairs was another reason why delegated consulting should find much favour among employers of struggling defined benefit schemes: "You can imagine the gasps of disbelief from the employer's finance team when they look at the cost of the pension scheme and are then told that the sponsor has no real say in the investments and there's no requirement for an expert to be on the trustee board."

"For the employer this is a multi-million pound liability. So they get comfort from the role of delegated consulting," he added.

Not just 'balanced' funds
Many new products and operations in the financial services arena suffer from comparisons with similar offerings from the past - partly to point out that something may not be as 'new' as it claims to be. Delegated consulting is no different in this respect. Playing devil's advocate, Mohammed asked the panel if it could be described as a new type of 'balanced' fund.

"I guess balanced was set up originally to do much the same thing - pay liabilities from the fixed income and hedge inflation with your equity side," conceded Philpott.

"But we certainly wouldn't want to be thought of by anyone as a provider of a generic 'balanced' solution - the way we see it going forward is not just confined to investors accessing a series of niche products."

Rejecting the comparison, Bailey said that delegated consulting was a far wider proposition. He reminded the panel of how the 'balanced' offering eventually became a very straight-jacketed vehicle where no real asset allocation decisions were taken.

"It's almost a reaction to the death of balanced management," said Webster. Schemes had balanced managers because trustees accepted that they were not investment experts and did not want an active role in scheme investment, he said.

"Then they realised this approach wasn't very scheme specific and went to the other extreme of taking over control of investment decisions while still not being experts. And now there's a reaction to that. Trustees are looking for an expert to work on a scheme specific basis."

Delo expressed a fear that some providers could be tempted to provide a service akin to balanced management, while trying to pass it off as something more developed. In light of this, trustees would have to keep a close eye on what they were buying as well as ensuring that the service they were using did not fall prey to the same problems that balanced management had - herding.

"There is a danger of some houses, perhaps who are not used to the commercial pressures of being an asset manager, comparing the performance of their offerings with each other. Then those lagging behind get too aggressive, those leading the way too defensive. But that's a governance challenge for trustees and the industry to make sure there isn't a herding situation," said Delo.

Webster added that this could be avoided in the way in which results were presented. "If you compare asset allocation by benchmarking it against other schemes then that will lead to herding," he said. "It has to be a scheme specific approach to asset allocation."

The panel agreed that avoiding this sort of behaviour would be a challenge for all parties involved, but the onus would fall on the consultant to help schemes concentrate on their own plans, rather than constantly checking on what other schemes were doing with their assets.

Role of trustees under the model
If a scheme were to adopt a delegated consultant, then what would a trustee board's role look like under such a governance model?
This was a rather difficult area to clarify, said Delo, as in an almost Catch-22 situation, trustees should be a bit remote from the investment process but, conversely, they should also be a lot closer and have a good understanding of how their assets are being deployed.

Bailey viewed the role of the trustees as one similar to that of a board of directors in a company and the consultant's as that of an executive management team.

"The board of directors should understand what the managers are doing, why they're doing it and hold them to account if they're not doing it properly, but they are not going to get involved in the day-to-day management or why they have x,y, or z in their portfolio."

Philpott, tackling that very point, said that looking into all the individual products trustees were tied into would be a somewhat pointless exercise. From his own experience, the level of detail his own firm can go into on a quarterly basis with consultants was of a nature that was too complicated for non-investment professionals - i.e. your average trustee board.

"Trustees currently spend far too much time wondering why their asset managers are holding this or that stock instead of focusing on the objectives and the manager's role in achieving those objectives," claimed Webster. "A delegated consultant should help them to focus more on why their objectives have or have not been met and whether those objectives are flawed."

As they already rely heavily on their investment consultant when looking at fund manager governance, it is in many ways better for trustees to step up a level and look at the consultant's selection and due diligence process rather than trying to drill down into the world of the underlying fund manager, he added.

Fazal took this point a step further, highlighting the fact that trustees had much to improve on when it came to due diligence of third party providers.

"Trustees need to be educated better on due diligence on consultants and asking the right questions before appointment, rather than two years down the line," he argued.
He drew on evidence from a PriceWaterhouseCoopers survey to make his point. The firm's research found that most schemes looked at past performance to judge whether or not an alternative asset manager was worth appointing, and then would sack them not because of poor results, but predominantly for poor governance or lack of transparency.

"This doesn't just apply to delegated consulting," said Delo, "trustees should be doing it generally. Too little trustee time is spent questioning consultants about how they come to their ratings."

How it will look in operation
So what exactly, in terms of added value, could trustees expect from such a service?

One area identified by Philpott was more robust manager selection. A consultant, he claimed, can take a more measured view of what a manager has to offer and is less likely to appoint a firm on vague grounds such as "feeling a better connection".

"It's amazing how the same names crop up at the moment with schemes saying they like their approach and then three years later they get rid of them because that approach didn't turn out right for them," he said. "So on the selection side trustees could see a very positive outcome."

"If trustees think that having a delegated consultant in place will make their lives easier, then they're wrong. They will have to work hard in different areas to make best use of it," warned Delo. "But in theory, it should be more tactical, more qualitative, more aligned with objectives."

Bailey believes it could also prove to be more cost-effective for a scheme, certainly in the long-run: "Fund managers won't want to hear this but if they're not having to service every client individually then you should be getting the benefits of buying in bulk. That should bring through significant savings. Bulk buying can save time for fund managers and leave time to talk about more with consultants."

What's more, he added, the adoption of delegated consulting should make life easier for trustees: rather than having a large number of intricate products that they think they ought to know about, they can actually focus on a more limited range of issues that they can look into with more depth. In this sense, he argued, it gives trustees improved governance of the scheme.

Webster disagreed however, saying that a lot of trustees would be put off by the 'easy life' sell. "They would think - 'I spend 40 per cent of my time looking at fund managers; that's what trustees' do. Now I'm supposed to give that role to someone else?' I think trustees will need a much more positive reason to delegate," he said.

In which case, offered Delo, delegated consultants would have to work hard on changing behaviour in this area and helping trustees to drop the habit of 'second guessing' their manager or asset selection.

Assessing the consultant
All this is all very well, but the panel agreed that there was still some
clarification needed on the level of advice involved in both appointing a delegated consultant and then monitoring its performance.

In order to avoid the 'risk' or extra expense of hiring another consultant to help assess the delegated mandate, Bailey stressed the importance of transparency when agreeing contracts, but pointed out that independent trustees could play a crucial role in helping develop clear and robust assessment processes.

"That's what they (independent trustees) are there for - to make sure that the right people are accountable and the right things are being focused on," he said.

Delo suggested that a chief investment officer-type figure on a trustee board could also help in this area.

"I think it's fair for a trustee to ask a consultant how they should measure them," said Fazal. He also pointed out the need for trustees to spend more time flushing out firms' operational methods as well. Since delegated consulting was a new concept, without precedent in the UK market, both parties would have to work together to ensure appropriate transparency in their assessment methodologies.

"It's a two-way thing," he said. "The consultants are going to have to help trustees in measuring what the objectives should be. It's easy enough if things are going well in a bull market, but how do you measure when the market's tanked but actually they've done a good job. These criteria need to be set up front."

"It is fairly simple to tell a fund manager what to aim for and give them a benchmark to judge them against," added Webster. "If, when you appoint a delegated consultant you haven't agreed the objective, then they will not stand a chance and you won't be able to measure the success."

Mohammed offered the following method of assessment: if the overall objective of the scheme is to achieve buyout within a given period, then setting a trajectory to that goal would allow the scheme to measure progress. The next level down would test the delegated consultant's 'nimbleness' which, unfortunately, requires shorter reporting periods, but is the only way to test that feature of the service. The final level would look at the asset classes and underling managers.

"If we can get trustees to focus in that order, that would have been a huge step in the right direction," he said.

Bailey stressed that no two schemes would be able to adopt the same measurement model.

"The fact is that some schemes will need to run risk further and longer than others," he said. "It's going to have to be a very specific measurement for individual schemes."

Short-term vs long-term
You've got to keep well away from too many numbers in the short-term," said Delo, acknowledging that it's easier said than done.

"The top level monitoring should be about looking at the decisions taken and why they were made, not evaluating the success of those decisions after the event in hindsight. This is a key trick that trustees can rarely get their heads around. Trustees should look at these decisions and ask themselves: were they valid at that point?"

For this reason, he argued that trustees need to give a consultant a 10-year time frame: "You may want to fire because the delegated consultant has failed to invest in the team or research, but if all the inputs are looking correct - you have to stick with it."

Fazal questioned such a long-term view, pointing out that since schemes currently have a natural three-year evaluation span, thinking beyond that sort of a time period would be very difficult. "I agree with the concept," he said. "But how can you think in 10-year horizons when you have to have these numbers every three years, how do you square this circle?"

Webster agreed, pointing out that the difficulty with measuring performance would be in trying to limit trustees' short-term focus. He added that consultants would have a challenge to try and keep trustees happy while giving themselves time to show that the delegated model actually delivers results.

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