It’s not an easy choice, as each option is well-suited to different functions and outcomes.
By Ed McCarthy
Canadian pension plans rank highly against their international peers, as we discussed in a previous CAiP article. An important element of that success has been plans’ efforts to manage a greater percentage of their assets internally, which potentially reduces costs, and to redeploy more resources to their investment teams, including risk management and information technology.
A recent CIBC Mellon survey of 50 leading Canadian plans, “In Search of New Value: Chapter 2,” reports that plans continue to emphasize developing internal capabilities while simultaneously recognizing that outsourcing plays an essential role. Among the survey’s key findings:
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64% of pension managers believe that clearer alignment of strategies to long-term objectives is a key benefit of internal asset management
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66% reported that bringing asset management in-house generated cost savings; among those respondents, 91% reported achieving savings of more than 10%.
Alistair Almeida
Improved plan governance is another consideration, according to Alistair Almeida, Segment Lead, Asset Owners at CIBC Mellon in Toronto, Ontario. “With pension plan sponsors and managers coming under increased scrutiny from regulators, plan members, employers, counterparties and other stakeholder groups, the fact that an in-house team can potentially enhance governance may become even more crucial,” he says.
According to CIBC Mellon’s research, some asset classes are more frequent candidates for in-house management than others. “For example, pension funds are more likely to be managing cash, private debt, investments in-house at the moment,” says Almeida. “By contrast, in more specialist areas, such as infrastructure and derivative contracts, the dependency on external managers is higher.”
Carmen Staltari, Director, Investments with Willis Towers Watson in Toronto, says his firm sees plan sponsors outsourcing the implementation and execution of their long-term investment strategy. Broadly, that includes portfolio construction, operations and monitoring. “This appears to be the most effective approach for the majority of plan sponsors unless they are large enough to have internal dedicated teams,” says Staltari. “Even these larger plans, call them $10 billion and above, are looking for a way to improve outcomes and have leveraged the outsourced model to access unique investment solutions they could not build on their own or gain access to similar strategies but at significantly reduced fees.”
Motivations for Outsourcing
Carmen Staltari
Bringing an operation in-house requires adequate infrastructure and that is proving to be a challenge among plans. Survey respondents pointed to internal expertise (70%) and technology capabilities (60%) as the leading barriers to increased use of internal asset management. Of course, those same barriers make the case for outsourcing.
Staltari says that outsourcing lets plan sponsors better access their partners’ best investment ideas: “With discretion to build portfolios on behalf of their clients, delegated partners can access managers who they believe to be the most skilled in their respective area of expertise. In some cases, they are able to create unique solutions that access a niche part of the markets that a client would not traditionally have access to.”
Keeping pace with developments in technology’s role in asset management will not get easier, according to Almeida. He maintains “that bar is only likely to move higher” as tools and technologies such as data analytics, data science, machine learning and artificial intelligence become more embedded in the asset management sector.
“Data is increasingly the lifeblood of the investment process, with rapidly rising complexity across asset classes, global markets and information sources,” Almeida says. “Many asset owners, like many other institutional investors, have evolved technology environments over time through iteration, and are facing challenges as their goals and needs outstrip the capabilities available from their legacy technology platforms.”
To learn more about in-house versus outsource decisions, register for the June 8 CAiP Virtual Forum, Pension Fund Operations: Risk, Due Diligence and Governance, which will include a panel discussion, “Internal and External Management of Pension Funds.”
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
