In an increasingly challenging investment and regulatory environment, many pension plans are looking to a new model, delegating key investment management and service activities to third-party providers, said Ivor Krol, vice-president and lead of the institutional portfolio solutions group at Phillips, Hager & North Investment Management.
Speaking at the 2018 Defined Benefit Investment Forum in Toronto on Dec. 10, he said fiduciaries have full discretionary decision-making over all investment management and governance activities in a traditional approach. “So that means that everything from hiring and firing managers, to asset-mix rebalancing, the fiduciaries would make the decisions and then direct their third parties to act accordingly. Now, because these activities are becoming more challenging and, in many cases, time and resources are likely diminishing, this is what has primarily led to the proliferation of an alternate approach whereby the fiduciaries are explicitly delegating these activities to third parties.”
In the new delegated approach, also commonly referred to as the outsourced chief investment officer approach, third parties exercise discretionary decision-making and take on the fiduciary responsibilities for those traditional activities, said Krol. “The key distinction between the traditional and alternate approach is that acting with direction versus acting with discretion.”
A plan may go down a delegated model route when it has less internal resources to complete the job in-house or if it wants better risk management, additional fiduciary oversight, increased returns, faster implementation or decision-making and cost-savings, he said.
However, Krol noted the delegated model may not be the universal solution for all plans, and there are various ways a plan can delegate to a provider, including consultants, asset managers or independents, such as insurance companies and record-keepers, which each have a core area of expertise. Some delegated providers offer services related to their core area and some provide end-to-end services, he said.
It’s not just a binary approach where investors delegate everything or nothing, there can also be partial delegation, said Krol. As well, some providers offer open or closed solutions. With open solutions, the provider can source a manager from anywhere in the world. In closed solutions, a provider ultimately manufactures all the capabilities itself or through its immediate affiliates, he explained.
Since no two plans are alike, Krol emphasized the importance of looking for a provider that offers customized solutions and not just a cookie-cutter approach. “The important point is that the right type of provider, the right type of model, will ultimately depend on your objectives, your particular situation and your governance framework.”
Typically, some critical components of the governance cycle can’t be delegated, said Krol. For example, a delegated provider can’t set a long-term asset mix and define investment objectives, beliefs and risk tolerance. Also, the delegated provider wouldn’t sign the statement of investment policies and procedures.
But the rest of post-SIP&P implementation is typically delegated, he added. “No matter the extent of delegation that is envisioned or undertaken, fiduciaries are always accountable for overall outcomes.”
For this reason, it’s important for plans that go this route to properly document and select the rational for their selection, evaluate if the provider is measuring up and look for other options if the provider isn’t delivering as expected, he said.
“If you give somebody your car keys and they crash the car, that’s going to come back onto you.”