European pension funds need to make “fundamental” behavioral and cultural changes to succeed as modern investors, according to paper from the 300 Club.
Though plans have made some improvements in governance practices, asset allocation, and execution capabilities since the 2008 financial crisis, much work remains to be done, argued Sally Bridgeland, senior advisor at Avida International, and Amin Rajan, CEO of CREATE-Research.
“There have been far fewer improvements in the less tangible aspects of pension business models,” said Rajan. “To create fundamental and meaningful change, a behavioral and cultural shift is needed for pension funds to navigate the new waters they face today.”
“Trustees have adhered to the traditional model of managing the easy things that don’t matter and avoiding the harder things that do.”Rajan and Bridgeland are members of the 300 Club, a select group of institutional investors intent on challenging their industry’s status quo. Its members include Chris Ailman, CIO of the California State Teachers’ Retirement System, and Adriaan Ryder, former CIO of QIC.
In their paper, they argue that investing today is like tennis: The winner is “not the one with the best strategy, but the one who makes the least mistakes.” Returns, they argued, have become less about asset allocation and more about implementation.
Good governance, therefore, is essential. But there is a “yawning gap between the rhetoric of the governance improvements of recent years and their reality on the ground,” Bridgeland and Rajan wrote.
“In many cases, trustees have adhered to the traditional model of managing the easy things that don’t matter and avoiding the harder things that do,” said Bridgeland. “Many of the changes so far have focused on low-hanging fruit: targeting specific areas that are easy to define and tackle without reinventing operational or governance capabilities.”
To help trustees tackle the “big, difficult decisions,” Bridgeland and Rajan suggested a six-step process.
First, they said trustees should foster a dialogue with plan sponsors that frames the relationship as a partnership rather than a source of conflict. They should then develop a strategy for how the pension fund will succeed and fulfill its mission.
Once a strategy is developed, trustees can test its resilience through the lens of possible financial outcomes. They also should identify the external partners—whether fund managers, consultants, fiduciary managers, administrators, or systems providers—who can help carry out that strategy.
Next, Bridgeland and Rajan said trustees need to take control of meeting agendas and priorities to ensure appropriate focus is given to the things that truly matter.
The final step is to ensure promptness, transparency, and visibility in management information.
“If that is achieved,” Rajan concluded, “then difficult decisions can be made with confidence and pension business models stand a far greater chance of being able to implement effective change to adapt to today’s new investment reality.
Related: ‘Managing Uncertainty’: The Changing Face of European Pensions