While an outsourced chief investment officer model may be the right option for a pension plan under particular circumstances, circumstances can change.

Wawanesa Mutual Insurance Co. took on an OCIO structure several years ago, but changes within the company made the model less appropriate over time, said Wes Peters, the company’s vice-president of investments, during a session at the Canadian Investment Review’s 2019 Defined Benefit Investment Forum in Toronto on Dec. 6.

“It was the right solution for us at that time, given who we were at that time. Our situation changed.”

When Wawanesa first started exploring the idea of using an OCIO, it had a relatively small, but growing, defined benefit pension plan, said Peters. “It was in a balanced structure, so not state of the art, even at the time.”

More specifically, it split the assets between two balanced funds with essentially identical asset allocation. This didn’t provide the plan with access to alternatives, or the diversification the pension committee had been hoping for.

Ultimately becoming dissatisfied, the question became how best to achieve these new goals of added complexity and diversity in the portfolio, he said. “This was a daunting task. So, we hired a consultant.”

The consultant helped the committee delve deeper into what it would mean to use a specialist structure, and the committee ultimately decided it wasn’t comfortable with the decisions it would have to make regarding alternative assets. “They didn’t want to make decisions about hiring five, 10 or 15 investment managers, nor did they have time to monitor them.”

This led the committee to the OCIO structure, which it introduced in 2013. The structure achieved many of the improvements Wawanesa had hoped for, including more diversity, better governance and increased sophistication, Peters noted.

However, as an insurance company, Wawanesa has plenty of insurance assets under management, so over time, it began bringing more of that asset management in-house. This increased its own staff’s investment capabilities. And with more internal resources at its disposal, Wawanesa started re-examining its pension strategy.

First, the committee analyzed the pension portfolio’s newly found diversification and determined that it was, in fact, excessive, said Peters. “We had money in an infrastructure fund. . . . Within that fund there were over 20 underlying managers. So we have a tiny portion of a fund that invests in many, many underlying managers, all of whom are diversified. It sounds like over-diversification.”

The committee also discovered some overlap between the money managers it was using for its insurance assets and through the OCIO pension model, said Peters. So the fund opted to remove itself from those relationships on the OCIO side and, instead, have a direct relationship with those managers for both pension and insurance assets, which led to an overall lowering of fees.

The most significant problem, said Peters, was that as a company, Wawanesa has a statement of investments beliefs, which was naturally different from its OCIO provider. That was difficult for the company to reconcile, he added. “For our insurance portfolio, we like Canadian small cap. For our pension portfolio, we don’t like Canadian small cap. We think global is better. But we’ve got both, so that makes no sense.”

These points of divergence arose across many different asset classes and strategy preferences.

And gradually, Wawanesa is moving toward more consistency and away from an OCIO arrangement.

However, even with the shift away from OCIO, Peters acknowledged that using an OCIO taught the company a lot. “It was very helpful, but today, given our resources, we’re able to do things in an even better way.”