Three of the UK’s largest pension schemes reflected on when to insource and when to outsource their investment strategies at the Pensions UK Investment Conference.
The Universities Superannuation Scheme (USS) does not invest passively in-house. Nor does it look at specialist or niche areas in-house or invest in an asset where it sees a purely short-term opportunity to add value, observed Simon Pilcher, USS’ chief executive of investment management.
Speaking about his experience at Railpen, session chair and independent trustee John Chilman agreed. “There are assets you want to be in for a period, and you don’t want to build a team only to then dismantle it.”
“We have decided not to go down the in-house route for now,” said Liz Fernando, chief investment officer of Nest Invest. She caveated: “That’s not to say we will never do things internally.”
“We must be cheaper if we are going to do anything in-house, whatever service it is.”
Jayne Atkinson, LGPS Central
Fernando added: “There is a lot of academic research which suggests that internal management gets better results than fully external. In Nest’s case, that isn’t true. Because of our size, scale and growth in assets under management, we have been able to negotiate some amazing deals. The quid pro quo is we partner with [managers].”
Jayne Atkinson, chief investment officer at LGPS Central, said the pension asset pool takes a case-by-case approach to the issue. The factors in her mind are capacity, capability, associated risks and cost, she said, adding: “We must be cheaper if we are going to do anything in-house, whatever service it is.”
There is no right or wrong answer to the outsourcing question, which will depend on a scheme’s purpose and setup, observed Pilcher, saying: “You should expect us to be running money quite differently to each other given the different objectives of our schemes.”
Outsourcing and insourcing do not have to be completely polar, added Fernando. “There is a whole spectrum of things where you start taking more control, and so you are doing more internally, but you are not going the whole hog of having the dealing capability, or the sourcing capability. I think we will go on a journey up the curve.”
The answer may also change over time, pointed out Atkinson: “If I look at some of the big Dutch pension funds, they went through a cycle of insourcing, outsourcing, now some of them are going back to insourcing again. Over multiple decades, these things come in waves.”
