Many smaller Canadian pension plans are mired in outdated investing methods and susceptible to the impact of old-fashioned emotions on their desire to design a successful long-term investment approach for their constituents, says a report.
A Russell Investments Canada Ltd. white paper says there is a clear gap in resources and investment process between the Canadian “mega” plans (more than $10 billion in assets) and their smaller counterparts, which allows emotion to creep into the governance process of small- and mid-size Canadian pension plans.
Read: Pains of a small pension plan
Bruce B. Curwood, director of investment strategy at Russell Canada and author of the report, says smaller plans need to be more deliberate in thinking about what may work best for their fund. He believes they need to think outside the box and establish an investment framework to help ensure access to critical information to facilitate balanced thinking and overcome cognitive bias.
“The mega funds are already committed to this risk-managed approach, with often upwards of 20 specialists devoted to risk management alone,” says Curwood. “But how will smaller funds, which lack scale and resources and perhaps even the will to change, make that successful transformation?”
Read: Managing risk in a small pension plan
During the global financial crisis, he notes that larger Canadian plans were able to make significant enhancements to their risk management and governance processes while smaller plans simply weren’t able to keep up. In order to overcome these challenges, he suggests an outsourced chief investment office (OCIO).
Russell Canada managing director of institutional Joe Gelly describes investment outsourcing as a way for small and mid-size pension plans to partner with sophisticated investment managers.
“The OCIO model is a concept that has had strong awareness and acceptance in the U.S. and the U.K. but is still very much in its infancy in Canada,” he explains. “Through an outsourced investment model, there is less reliance on making emotional or irrational investment decisions. Decisions are set within an investment framework, which aims to strategically achieve the best possible investment outcomes.”