Corporate pension plans today find themselves facing an ever more complex regulatory and investment environment, with ever fewer resources, all while the plan itself may be becoming less and less of a focus for the sponsoring corporation . Hence the increased talk of outsourcing.
Outsourcing is just re–assigning a task
Actually, outsourcing is a misleading term: nobody describes the hiring of external money managers as being “outsourcing”, but that is, in effect, what it is. Outsourcing is just re–assigning a task to an external party.
One strand of the trend toward outsourcing in the U.S. marketplace today is the re–assignment of tasks as an end in itself. These plans—which are mainly smaller plans, although not exclusively so—simply prefer to offload responsibility for as many pension–related tasks as they can. Another strand is the re–assignment of tasks in order to improve the investment process. Here, tasks are outsourced only when there’s a clear benefit to doing so.
Money manager oversight—but that’s not all
In today’s marketplace, the tasks around which many outsourcing conversations revolve are the selection and monitoring of money managers. Those are the key components of most OCIO (or Outsourced Chief Investment Officer) offerings. But that’s far from being the whole outsourcing story.
Indeed, simply switching out responsibility for those two tasks within the existing governance structure of a plan may bring only modest gains. Certainly, OCIO providers can bring specialist focus and greater responsiveness to the manager oversight process, but this approach still leaves asset classes lined up side-by-side in silos, and there’s little chance to coordinate risk exposures at the total portfolio level.
Outsourcing opens up the possibility of changing the governance structure in ways that may not have been possible before. For example, the asset allocation policy can become more opportunistic, allowing the outsource provider to access “in between” asset classes such as bank loans or global listed infrastructure (or a long list of others, at different times) in a multi–asset portfolio structure, leading to a more diversified portfolio as well as a more dynamic one. Including these asset classes is often not feasible without outsourcing because internal staffs can only do so much. This multi–asset approach also allows a holistic approach to risk management.
These benefits mean that even some of the largest plan sponsors—who may not regard outsourcing as appealing for its own sake—are allocating portions of their portfolios to multi-asset OCIO–like strategies. It’s an opportunity to do something that simply may not be possible given their own resources and governance structures.