The One-Stop Pension Shop. Really.

From aiCIO Magazine's Summer Issue: The trend of full-service banks forming their pension-dedicated units has accelerated since the global financial crisis.

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Add Citigroup to the growing list of full-service banks formalizing their pension-dedicated units. Asset managers and banks have tried this before (think Putnam Investments in the late 1990s), but the trend has accelerated since the global financial crisis. Deutsche Bank, Morgan Stanley, Goldman Sachs: All have units dedicated explicitly toward coordinating pension relations across products, often led by well-connected and well-versed industry stalwarts. Heading Citigroup’s effort is the recently hired Charles Millard, formerly the Director of the Pension Benefits Guaranty Corporation (PBGC) during the Bush Administration who led a charge to alter the group’s asset allocation with an eye toward closing the large deficit he inherited.

The logic behind Millard’s and Citigroup’s focus is clear. “When you think about pension plans, they are doing something tremendously important, they are frequently very large pools of capital, and they touch these large banks in literally dozens of ways,” Millard says. “If the contact isn’t coordinated, it can be a mess. Properly coordinated, it can be like an orchestra.” Think of it as someone able to reach into any pocket of a bank’s black box and pull out an essential tool—or, as was recently the case with Millard, bring pension clients together for a multiday conference to show off the bank’s stable of thought leaders (including former Office of Management and Budget Director Peter Orszag) and famous connections (billionaire hedge funder John Paulson). “I sit both on a trading floor in markets, and in an office in Global Transaction Services,” Millard adds. “That lets me focus—my job is to think about pensions the way pensions think about themselves.”

The response from the pension fund side—and especially from the demanding public fund sector, which has its own unique constraints—has been largely a positive one. “These units have been around in one way or another, formalized or informally, for a number of years now,” says Timothy Walsh, Director of the $73 billion New Jersey Division of Investment. “It’s advantageous when you’re dealing with big firms—sometimes it’s easier to have one person to deal with within the bureaucracy of these big banks.” There is a possible downside, of course. “The potential negative is the difference between someone who knows all the issues, and someone who is just a salesperson. The risk is of turning people off, so it’s essential to have someone qualified to do it.” This someone often comes from the public pension sphere, Walsh adds, because they understand both the investment issues of running a large capital pool as well as “the regulatory and bureaucratic issues” involved in the public space.

Unsurprisingly, the creation of such groups is viewed as a natural—and beneficial—evolution. Pension plans, especially public ones, are increasingly controlling a greater amount of capital. The outcome of this fact, then, is the formalization of such bank-based groups. “In the end, it’s a new positive for us,” Walsh concludes. —Kip McDaniel