The most important characteristics in advisers differ by scheme size, but the approach to investment is not overly dissimilar, James Phillips writes
In times of climbing deficits, low interest rates, and growing inflation, an investment strategy can prove crucial to ensuring sponsoring employers are not forced to pour extra cash into their schemes.
Trustees of defined benefit (DB) schemes of all sizes invest their trust in appointed fund managers and investment consultants, yet the overriding reasons for doing so are not always clear. The choice can come down to experience, previous performance and how much a firm might already be looking after.
But is there a consistent theme across schemes, and do approaches taken differ between schemes depending on their size?
Aon Hewitt and Leeds University Business School posed these questions to 197 mainly DB trustees and scheme managers, and analysed the answers in a joint report: Selecting fund managers and consultants - what do trustees look for?
Strikingly, schemes of all sizes are acutely conscious of prospective fund managers' attributes on "hard" factors - decision-making, and costs and fees, for example. However, smaller schemes are more likely to take into account "soft" characteristics, including relationship managers, existing relationships, and presentations to trustees.
Schemes with assets totalling more than £2.5bn, for example, gave most weight to investment philosophy with an average importance score of around 75 out of 100. Yet, for schemes under £100m, this scored just 65.
Conversely, the smallest schemes, with under £100m of assets, gave fund managers' performance track records a rating of 75, while the larger schemes scored it 58.
Aon Hewitt partner John Belgove says differing importance may be down to the varying infrastructure and governance between scheme sizes.
"Bigger schemes tend to have stronger governance capability and more experts on the trustee board, and they operate with more sub-committees where they've got individuals who are specialists in the area," he says. "It's more business-like and they tend to be driving hard at the metrics they're interested in."
"Small schemes with fewer resources tend to be more taken by things like past performance record rather than actual performance delivery, and are focused more around ‘did I understand the presenter? Do I have a good chemistry and relationship with them?'"
For investment consultants, on the other hand, the difference was very minimal. Trustees again were asked what they thought was the most important characteristic in a consultant, and a somewhat unified response appeared: clear advice, understanding the scheme's situation, understanding trustee goals, and ability to manage risk scored highly across all types of schemes.
There was, however, some small divergence, with trustees of larger schemes caring more than their smaller counterparts about the size of an investment, depth of specialist knowledge and personal chemistry, and smaller schemes valuing reports and presentations, and costs and fees more highly.
The desire for a regular review of investment strategies was also apparent as the bulk of trustees (64%) said they evaluated these at least once a year, and as many as 17% reviewed them quarterly.
On the other hand, 15% only reviewed their strategy at most every three years, and a handful (1%) did not know how frequently this assessment happens.
"As we've come into a more mature end of the DB pension challenge and schemes have closed to accrual, there has been a shift towards a more risk-focused approach of effectively decommissioning these funds and securing the benefits for the members," adds Belgrove.
"With that has come a much more frequent strategic focus where de-risking is causing more regular strategy reviews. It used to be three years or more for everyone and these days a not inconsiderable number are looking at it on a very regular and quarterly basis. I see this trend continuing."
For most respondents, a changing investment strategy was the primary driver for reviewing an investment mandate, but de-risking and past performance were also cited highly. In contrast, costs and fees ranked bottom, behind consultant recommendations and a desire for additional returns.
Schemes were more divided on the timeframe for evaluating their investment managers, with just over one in five (21%) considering this quarterly, and just over a quarter (26%) leaving this for at least three years.
Belgrove believes these reviews will act conversely to those of strategies, becoming much farther apart as the years go on.
"There is a lot of push, particularly from the asset management industry, to review managers less frequently," he says. "Managers are used to being under the quarterly spotlight, but many managers - particularly active - are saying they need a full market cycle to be measured over."
Reliance on advisers
This could partly be explained by the reliance placed on consultants by trustees, with the vast majority of schemes of all sizes saying they had a lot of reliance and a not insignificant handful saying they were completely reliant.
The largest schemes were least likely to have a lot of reliance on advisers, with just 46% compared to 65% of the smallest schemes, but were also most completely reliant at 10% compared to 5%.
Leeds University Business School associate professor Dr Ian Clacher says this is somewhat worrying: "In looking at the relationship between trustees and investment consultants, the research demonstrated that smaller schemes are more reliant on their investment consultants than larger schemes, which is understandable given the resource constraints they face.
"However, in the case of the small proportion of schemes - of all sizes - who say they are totally reliant on their investment consultant, this is a real concern."
Despite this, a significant chunk of all schemes said they regularly consider other alternative investment options than put to them by their advisers, with 12.2% of the £2.5bn plus schemes always looking at other options.
The results will give some indication of exactly what trustees are looking for in their fund managers and investment consultants, as well as informing those in these roles how best to approach and support their clients.
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