Delegated investment by pension schemes enters the mainstream, says Aon Hewitt
New study shows schemes are embracing greater agility to overcome market fluctuations
LONDON, 17 October 2011 – Aon Hewitt, the global human resource consulting and outsourcing business of Aon Corporation (NYSE:AON), has released findings from the 2011 Aon Hewitt Delegated Investment Survey which shows that delegated investment, also known as Fiduciary Management, has become more widely accepted in the UK. Almost one in five respondents to the survey (17%) reported that their pension scheme had already delegated investment decision-making and implementation to a third-party provider. A further 8% of the survey sample said that they intend to explore opportunities to delegate.
The survey of 299 pension trustees, pension managers and others was conducted in June 2011. Its findings are in keeping with the sentiment highlighted in Aon Hewitt’s 2010 Delegated Investment Survey which showed that a quarter of respondents wanted to delegate investment decisions in one of the three key areas of asset allocation, swaps and manager selection.
Notably, this year’s findings suggest that continued market turbulence has accelerated the acceptance of delegated investment as a mainstream offering. Some 40% of responses to the survey focused on speed of investment decision making and investment implementation as the priority drivers of delegation. Turbulent markets are acknowledged as requiring greater investment conviction and market agility. Respondents went on to say that factors hindering scheme agility were typically the frequency of trustee meetings, the time resource available for dedicating to investment issues and matters relating to governance structures.
This shows a significant change since 2010 when 46% of respondents cited trustee knowledge and understanding as the primary driver to delegation.
John Rushen, UK Head of Investment Consulting at Aon Hewitt, said:
“It is true that governance structures can stymie a scheme’s ability to act swiftly on investment irrespective of trustee commitment and the complexity of today’s investment landscape is felt to compound the issue. But, the opportunity cost of sluggish execution is only heightened by periods of significant market volatility, such as we are currently seeing.
“As predicted last year, market volatility therefore remains a critical factor for pension schemes. It can erode confidence in the decision being tabled, but then also makes the timing of execution critical. When the market moves several percentage points a day, opportunities to capture value come and go. Market timing requires focus, skill and conviction if the outcome for the scheme is to be positive.”
This year’s survey also shows that, in the absence of delegation, the opportunity to reduce risk and optimise performance through asset class diversification continues to present trustees with significant challenges. Some 43% of small schemes and 43% of medium schemes are invested in no more than three asset classes. However, just 8% of respondents cited risk diversification as a key driver in chosing to delegate.
John Rushen continued:
“It’s disappointing that there has been little movement in the hours spent on investment issues or number of investment experts on trustee boards since last year’s survey. When you are spending less than 20 hours a quarter on investment matters, trying to reduce market exposure through wider asset allocation can be a daunting prospect. Putting more assets in the mix requires greater monitoring and judgement.”
“But, diversification at the asset class level or in terms of strategies and styles can further reduce portfolio volatility and we expect this to become a more prominent driver of delegation in the near term.”
Globally, Aon Hewitt currently has 70 schemes with delegated assets under management of more than £10billion.