Engaging with your investment consultant

Simon Cohen

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Spence & Partners latest blog for Pension Funds Online

I believe that clients should be using and taking more advantage of their investment consultant. I see clients paying for actuarial valuations, reviewing actuarial factors and other matters but generally not making full use of their investment consultant. Clients legally have to do a valuation or other compliance work, but often see investment work as something that is secondary to this. For example, there is not a legal requirement to carry out an investment strategy review like there is for a triennial valuation, it is just considered best practice, so sometimes one isn’t carried out.

I sometimes see cases of trustees who haven’t reviewed their investment strategy in over 10 years and their Statement of Investment Principles in a similar period of time.

It is all a bit strange especially since when I attend meetings, trustees seem very interested in investments and sometimes have strong views on the markets.

Clearly, and obviously I am biased, but trustees and companies should be using us more. We can and do add value. There are essentially three ways of controlling pension scheme costs through:

1. Contribution rates
2. Investment strategy
3. Level/cost of benefits provided

The first of these typically (but not always) ends up being a function of how much an employer can or is willing to pay. For the third, often benefits cannot be amended, or if they are, it is a one-off change and then that’s that. From my point of view, the second item is important and can make a difference and it’s something that should be managed on a regular basis. If with my help trustees can improve their investment performance by say even 1% a year with or without reducing risk – surely it is worthwhile spending the money.

I have in the past heard trustees say “your advice costs money and we just don’t want to spend the money.” Agreed it does cost money, but I believe that it is money well spent, there is real value added. For example, if due to my advice on a £20m asset base, for example, you get an additional 1.5% – that’s £300,000. Surely it is worth paying a one-off fee of £10,000, as an example, for that extra return. By the way, that is a real live case not one that I have made up. Also, it is not just about getting additional investment return, it is also about managing investment risk, importantly managing that risk relative to your liabilities. Concerning risk management, the Regulator is very keen that trustees consider investment risk as this is covered in its guidance on integrated risk management.

I think these days there are even stronger reasons for carrying out a proper review. With modern technology, carrying out a full asset liability study, which was once the preserve of the big pension schemes, can be really cheap for trustees and particularly cost-effective for the smaller scheme. In my view, cost should no longer be a barrier to trustees asking people like me to do such work. Also, trustees should be monitoring their position to make sure that the investments are doing what they should be. Again, modern technology makes this cheap and easy to do. With potentially more muted investment returns going forwards I think it is more important that trustees are more actively engaged with their investment consultant.

Pension Funds Online

Simon Cohen

Post by Simon Cohen

Simon Cohen is an experienced pensions investment actuary who heads up the Investment Consultancy Services at Spence.