In-house capabilities are on the rise among Canadian pension funds, but outsourcing remains vital, according to Chapter 2 of CIBC Mellon’s In Search of New Value report.
The first chapter found that Canadian pension plans are repositioning asset allocations and increasing in-house asset management, after the COVID-19 pandemic prompted significant volatility in financial markets.
Its latest report identifies that despite pension funds’ plans to manage more assets in-house, it is also clear that outsourced asset management remains important for Canadian pension funds.
The results show that 64 per cent of pension managers believe that clearer alignment of strategies to long-term objectives is one of the key benefits of in-house asset management.
Meanwhile, some 66 per cent of pensions report that bringing asset management in-house has generated cost savings, with 91 per cent of those achieving savings of more than 10 per cent.
According to the report, pension funds say the leading barriers to in-house management include internal expertise and technology.
The report also finds 86 per cent of pensions using external managers who intend to look for lower fees over the next 12 months.
Commenting on why outsourcing is important and the in-house management challenges, Ian Fulton, assistant vice president, institutional and pension accounting, CIBC Mellon, explains many funds recognise the benefits of in-house management but do not feel this is appropriate for them.
According to Fulton, some may wish to focus in-house teams on certain asset classes, while leveraging external managers for other specific areas, while others may lack the scale or organisational commitment to undertake the substantial investments into talent, technology and data systems necessary to support an in-house management programme.
“With 60 per cent of respondents pointing to in-house technology capabilities as standing in the way of in-house asset management; that bar is only likely to move higher as tools and technologies such as data analytics, data science, machine learning and artificial intelligence become more embedded in the asset management sector,” he says.
Despite plans to manage more assets in-house, the research shows that outsourced asset management remains important for Canadian pension funds.
This makes sense given some of the barriers standing in the way of in-house asset management functions, but also because of the specialist expertise that external managers can offer, CIBC Mellon observes.
“The majority of our assets are managed externally. It limits the risk and liability for our organisation, with an assurance of returns as well,” comments the director of investments at one pension fund.
They note: “We collaborate with managers on a regular basis to improve our understanding of the investment strategies employed and to gauge their suitability overall.”
Such pension funds will need to choose these managers carefully, says CIBC Mellon, with rigorous selection processes and performance and compliance measurement underpinning their outsourcing programmes.
Given that one of the main challenges to in-house asset managers was in-house expertise, Fulton suggests the move to in-house management is not straightforward, from the technology required to the talent involved.
According to the research, 70 per cent of pension managers regard in-house expertise as one of the top three issues they have to confront in any shift to in-house asset management.
Additionally, CIBC Mellon saw that Canadian pension funds are pursuing investment strategies founded on portfolios with diverse assets, including significant holdings of alternative assets.
“Securing expertise in such a broad range of areas is naturally difficult,” comments Fulton.
While the rise in in-house capabilities in pension funds is an increasing trend consistent with the strong results Canadian plans have delivered for their stakeholders, Fulton believes stakeholders globally can look to Canada to learn more about this pension structure.
Further highlights from the report show that almost two-thirds (64 per cent) of pension managers say one of the most important advantages of in-house management is a clear strategic alignment of the long-term objectives for the fund.
Just over half (56 per cent) point out that in-house teams have a better understanding of the plans overall asset allocation.
The question of governance is also particularly important, according to the report. With pension plan sponsors and managers coming under increased scrutiny from regulators, plan members,
employers, counterparties and other stakeholder groups, CIBC Mellon outlines the fact that an in-house team can potentially enhance governance may become even more crucial.
According to the report, complexity rises further for multi-employer plans operating on behalf of a larger set of underlying organisational public and private sector stakeholders.
Half of the respondents see stronger governance as a key benefit of operating with an in-house team.
In terms of how the pension funds landscape will evolve in Canada over the next few years, Fulton highlights that the debate between in-house and outsourced asset management is not black and white.
“Our survey confirms that Canadian pension funds take a nuanced approach to investment models, employing a broad range of different operational strategies. Canadian plans are sophisticated and thoughtful and are deploying a diversity of approaches. There is no one size fits all approach,” comments Fulton.
Fulton explains that it is important to recognise that pension plan sponsors and pension fund managers are looking across the board at the in-house versus outsourcing debate - from operations to technology to investment management.
While 84 per cent of funds say they will outsource at least some of their regulatory reporting work over the next 12 months, it is notable that this is also an area prioritised for in-house investment.
Some 69 per cent and 59 per cent of pension funds respectively report they will invest in talent and technology in this regard.
“Different organisations have different views on the underlying pensioners’ needs. A pure pension asset manager may only need to consider the investment return and a social license to operate, whereas a plan responsible for benefit disbursements or even considerations related to the shifting expectations of the underlying members,” says Fulton.
Fulton concludes: “We anticipate innovation and change will continue as Canadian pension fund managers focus on agility and responsiveness in the context of a fast-moving investment environment.”
The survey gathered responses from 50 leading Canadian pension managers and was completed in 2020.
Half of the respondents had between approximately $600 million and $1.2 billion under management, and half had more than $1.2 billion under management.
