As pension schemes have become larger, more are thinking about how to cut out the middleman and hire internal specialists to handle their assets. But getting, and keeping, your own investment staff is by no means always straightforward.
While nearly all pension funds have staff who oversee external managers, not all of them also have responsibility for trading on the markets themselves. But more funds appear to want to take this route.
The Pension Protection Fund, the London Pensions Fund Authority and Railpen to name but a few, have insourced at least a portion of the asset management.
The benefits of doing so are obvious for large investors: the interests of investment managers are aligned with those of the fund; the scheme can react quickly to market movements; cost savings can be made; and managers are not distracted by business development activities.
In-house managers value the close alignment to the requirement of a sole end client
John Arthur, AllenbridgeEpic Investment Advisers
John Belgrove, senior partner at consultancy Aon Hewitt, said there is a trend towards in-house management.
“It’s quite noticeable that we’ve seen an increase in particular in the number of chief investment officers appointed to pension schemes,” he said.
According to Belgrove, funds are “upskilling” because trustees, who work part-time, might not have enough time to dedicate to the complex financial problem that defined benefit schemes pose for their sponsors.
Competing with the City
But it is not always easy to find that skill. Documents from the Teesside Pension Fund show it unsuccessfully advertised several roles in its investment team, which looks after a portion of the £3.1bn fund’s equities and bonds.
Of the four jobs available, only an administration assistant role had been filled in September.
A new investment officer position, which would be paid around £30,000, drew the interest of nine candidates. “Three matched the essential criteria and were offered interviews, but only two made the interview and neither were offered the post,” the documents state.
For the most senior position, investment manager, just one person applied but was not offered the job.
Location can be an obstacle, as can salary and other employment terms, especially for Local Government Pension schemes hiring investment professionals. LGPS schemes are bound by council rules around recruitment and salaries but nevertheless still have to compete with the financial services industry for talent.
The Lothian Pension Fund, which runs a portion of its £5.5bn of assets through a 10-strong in-house team – including a head of pension fund, an investment manager, six portfolio managers and two analysts – has identified the level of pay as a “key risk”.
A spokesperson said: “Remuneration can be a challenge to recruitment… salaries had not previously been benchmarked externally and the notice period provisions in staff contracts were not in line with market practice for relevant roles.”
The scheme is now getting around council rules by using a special purpose vehicle, set up earlier this year, through which to hire staff.
The Lothian spokesperson said: “To mitigate this recruitment and retention risk, the fund agreed to undertake benchmarking and to employ senior investment staff via a special purpose vehicle separate to the council.”
Lothian uses SPVs to sharpen in-house focus
Lothian Pension Fund is expecting to get Financial Conduct Authority approval for two special purpose vehicles by early 2016, as it looks to improve its in-house investment capabilities
Funds might find it hard to compete for talent with the financial services industry, but there are draws that schemes can use to promote themselves as employers.
The social purpose of providing pensions is one such draw, as is the opportunity – if the team is just being formed – to create something new and put the individual’s own stamp on it.
John Arthur, managing director of consultancy AllenbridgeEpic Investment Advisers, who spent 25 years as an in-house manager for the National Grid Pension Scheme, said the breadth of an in-house role and its clarity of goals made it attractive for investment professionals.
“Many of the people I talked to… spoke of the desire to get away from the conflicts of interest and internal politics incumbent in many large-scale asset managers. They value the close alignment to the requirement of a sole end client,” he said.
He likened in-house investment teams to small fund management businesses, and said they “rely strongly on the ethos and culture engendered by the senior team”, but warned that this brought key man risk.
The greatest challenge, he said, was governance. “The in-house team requires a strong governance structure, which – because running a pension scheme is not the core business of the end client – may well require a high level of independent investment specialists within the governance structure.”
