OCIO models more attractive in rough market conditions: report

The current market environment has the potential for long-term effects on the defined benefit pension investment industry, according to a new report by Cerulli Associates.

Broadly, investment consultants said they’ve been preparing their DB pension plan sponsor clients for a potential downturn for up to two years, noted the report. And, as plans have begun to digest the reality of the market turmoil caused by the coronavirus pandemic, certain trends are emerging.

For DB plans, the pandemic is creating a further challenge in maintaining funded status, since market conditions are making it more difficult to find high-yielding return opportunities. This increasing difficulty may prompt more plan sponsors to seek out de-risking services, noted the report noted. “The continuous pressure on these asset pools is likely to drive the need for liability-driven investing, glide-path services and multi-asset class solutions in the near future,” said Laura Levesque, associate director of institutional at Cerulli, in a press release.

Read: What options are available for de-risking DB pension plans?

Taken as whole, circumstances will likely lead more plan sponsors to consider adopting an outsourced chief investment officer model, said the report, noting the costs related to OCIO will seem more reasonable to asset managers who have comfortably managed pension plans through stable market environments, but now find the task far more daunting.

OCIO services have been gaining popularity since the financial crisis of 2008. “OCIO advisory fees are typically significantly higher than fees for more traditional advisory services and converting a traditional client to OCIO is a lucrative undertaking,” noted the report.

About a third (30 per cent) of investment consultants said they also offer OCIO search services where they help asset owners evaluate different OCIOs to identify the best fit, although these consultants typically don’t provide their own OCIO services. The report recommended that investors inquire about which services consultants perform to avoid potential conflicts of interest.

Read: Decumulation options, OCIO among pension trends for 2020

Institutional investors are also asking for more involved investment guidance from consultants, going beyond the usual asset manager searches, the report found. “As a result, investment consultants are being asked to provide more specialized advice on investment solutions for institutional asset owners.”

For example, 89 per cent of consultants said they expect a growth in the demand for environmental, social and governance solutions. There’s also rising interest in co-investment opportunities, target-date funds and other multi-asset-class strategies. “This is likely indicative of the reality that meeting investment goals continues to become more challenging in the current market environment,” added the report.