Ian Bailey explains how delegating investment decisions can be time and cost effective for pension managers

The American bureaucrat James Boren advised his colleagues: “When in charge, ponder. When in trouble, delegate. When in doubt, mumble.”

While not wanting to suggest that pension managers are in trouble, it would be fair to say most are operating at full stretch. They face multiple and complicated challenges ranging from questions of funding and investment to auto-enrolment and data cleansing. Many need to streamline the way they operate. Delegated investment services can provide welcome simplification.

Although designed for trustees who need more time and investment expertise than their quarterly schedules and governance structures allow, delegated investment services also provide huge benefits to pensions managers. In a delegated arrangement, trustees delegate investment decision-making and implementation to a third party – usually a consultant or asset manager – within parameters set by trustees. Delegated services are sometimes referred to as ‘fiduciary management’, or is also known as ‘implemented consulting’.

A fully delegated provider will select, implement, monitor and, when necessary, replace fund managers, thereby relieving pension managers of all the aggravation associated with these tasks. The appointment of a delegated provider also means that pension managers no longer have to ring half a dozen (or more) fund managers when they need something; they make just one call to the delegated provider, who takes on the role of dealing with fund managers and all that this responsibility entails. It is up to the delegated provider to
deliver the solution. This single point of contact allows pension managers extra capacity to focus on their other priorities.

Appointing a delegated provider takes time and care. It cannot be done casually. First, trustees need to consider what, if anything, they want to delegate. Second, they need to choose the right provider. It has to be a partner they can trust; a good delegated provider will be able to tailor their services to meet their clients’ needs.

The third step is key. You have to make sure that everyone has the same expectations. This means taking care with the contract (and the related paperwork). This sets out who does what, so that everyone involved knows their role. It also describes the investment objectives – which must be tailored for the scheme – and the permitted investment ranges. It is worth taking trouble over these documents.

But it can be very worthwhile - time will be saved once a delegated arrangement is in place. In just one example, pension managers are saved from having to negotiate a new investment management agreement for every new fund manager. Many conventional schemes review one or more of these agreements each year. The contract with the delegated provider frees pension managers of this burden. It has favourable implications for ongoing legal costs too.

Beyond a single point of contact and a single legal agreement, what other simplification benefits arise? Delegation can mean there is just one invoice to pay instead of one for each fund manager. It is often thought that delegation results in higher fees, but our research has shown that the effect of the delegated provider’s ability to secure bulk discounts from fund managers helps to offset any increase.

The most important simplification benefit is probably in reporting. Instead of having to understand reporting from multiple fund managers, a pension manager receives a single report from the delegated provider. This provides an overall picture of the portfolio’s risk and return against the agreed, tailored objectives, giving a clear snapshot of the state of the fund. Forming a single view from six or more reports is often difficult. For example, it can be hard to see if diversification has met the objective of reducing risk or whether the effect of adding asset classes or managers has been to increase it. A holistic report gives trustees the control they need to carry out their role more effectively.

In our 2011 Delegated Investment Survey we found a high level of satisfaction among those who had appointed a delegated provider. We believe simplicity is a major contributor to this level of satisfaction. We will be reporting the findings of our 2012 survey in the autumn. If you would like a copy of our report, please let us know.

Written by Ian Bailey, co-head, delegated consulting services, Aon Hewitt

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