Investment ManagementPension and Benefits

Smart Pension Play: Examine Outsourced Chief Investment Officers

By January 22, 2025No Comments

As assets in closed pension plans decrease, OCIO transactions become more appealing for corporates.

Turning to an outsourced chief investment officer (OCIO) to assume investment management and some fiduciary responsibilities for a pension plan makes a lot of sense to a growing number of corporations. Some have seen defined benefit plan assets shrink significantly as plans close or freeze and new hires are directed to 401(k)s.

  • Under those circumstances, the salaries and other expenses necessary to maintain an in-house investment management team that selects external asset managers become “harder to justify,” one member of NeuGroup for Pensions and Benefits said at a fall meeting sponsored by Insight Investment.
  • The member’s company recently turned to an OCIO to lower the cost of managing its pension assets and free up treasury resources to help the corporate address its main priorities. “Managing pensions is not our core business,” they said.

Scale and savings. The asset managers and actuarial firms with an asset consulting background managing large OCIO pools today can secure lower fees for investment products. By leveraging the OCIO’s scale, sponsors achieve better pricing than they can negotiate independently, helping to preserve plan assets and enhancing returns for participants.

  • One member noted, “These basis points make a huge difference in the long run—every basis point saved means that there is less drag on the assets in the plan.” Those savings may also offset the fees that sponsors pay OCIO managers—which are based on assets under management.
  • Beyond the savings, OCIO partners can bring a level efficiency to the management of the plan that most sponsor companies simply cannot achieve given a lack of internal resources. Presenter Gordon Fletcher, Senior Defined Benefits Strategist at WTW, noted, “These plans can be a burden on treasury and finance staff; they have to work on them in addition to their day jobs.”

Sharing fiduciary risk. Mr. Fletcher’s colleague, Jon Pliner, Head of Delegated Portfolio Management at WTW, said another key driver of the OCIO trend is lowering a corporate’s fiduciary risk. By appointing the OCIO as the named fiduciary, sponsors create a governance buffer between themselves and potential legal challenges. As one member said, “In Europe, it’s death by regulation, and in the U.S. it’s death by litigation.”

  • Several members said if a lawsuit should arise, having an asset management firm with deeper pockets listed as a fiduciary gives some sense of security to the sponsor company.
  • But while the OCIO assumes significant fiduciary duties, sponsors cannot fully offload legal or regulatory risk. “There is no way to offload all responsibility, but there is a fair amount you can share with a partner,” Mr. Pliner said.

Picking a partner. Corporates considering an OCIO should know the major players competing in this growing business: Mercer, Goldman Sachs, BlackRock, Aon and WTW are the top five OCIO managers based on assets. One consideration when picking a partner: weigh the benefits of choosing actuarial firms versus those focused solely on asset management.

  • The company that has completed an OCIO transaction sought firms with expertise beyond asset management, with an eye towards long-term planning. “Our gut feeling was that we were in better shape with the actuarial firms versus the pure asset manager firms because the discussion would also cover items like liabilities, net position, pension endgame options, and pension risk transfer (PRT) transactions,” the member said.
  • Another member asked if large investment firms are in the business mostly to sell their products. Mr. Pliner responded, “In some instances they may offer their investment products, but that’s not a blanket statement. You need to understand where they are getting paid and that incentives are aligned—as with any vendor relationship.”
Justin Jones

Author Justin Jones

More posts by Justin Jones