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Governance: The game changer

Without good governance around investment decisions, pension plans could be playing the game with the wrong playbook

Investments|Pension Board and Trustee Consulting

November 16, 2018

The governance burden on investment committees or boards of trustees is substantial. The governance challenge, if unaddressed, can have unintended and undesirable effects on the management of the pension plan.
  • It's Sunday night. Anna Chowdhury, head of the Investment Committee at ABC pension fund, is worried about tomorrow morning's meeting.
  • She recalls the last committee meeting six months ago when a decision was made to change one of the pension fund's equity managers but hasn't yet been implemented. Meanwhile, one of the other managers has continued to underperform over the last year and the Committee is considering termination.
  • The committee also needs to debate upcoming important shareholder resolutions in the energy sector regarding climate change and understand how its managers are voting on such matters.

The governance burden on investment committees or boards of trustees is substantial and it’s only getting bigger. At the same time, the world only seems to be moving faster, forcing boards and committees to shoehorn more tasks into the same amount of time.

To add to the challenge, enthusiastic regulators appear keen to keep everyone on their toes with new rules on issues ranging from new legislation to climate change. Mixing in investment strategies and monitoring, one can appreciate that running or even overseeing a pension plan is no easy task.

Trustees need to reflect on whether they realistically have the resources and the expertise to navigate and execute this task. The governance challenge, if unaddressed, can have unintended and undesirable effects on the management of pension plans.

A shaky foundation

The relentlessness of pension administrators’ ‘to-do’ list restricts the amount of time available for each agenda item. Decisions on manager selection and monitoring can only be allotted so much time in a packed agenda.

Icon: clipboard with checklist

Anna glanced at her watch. An hour had passed and it seemed unlikely to her that the redemption discussions from six months ago would conclude. Not the first time, she thought. She quickly did the math – 60 minutes per quarter to cover manager monitoring, selection and portfolio construction across the pension funds' 6 managers roughly meant spending 4 hours per year on their $300m equity allocation. Anna felt even doubling the time allocation would probably not be enough.

This scarcity of time and resources can change the shape of the portfolio structure by creating an upper limit on the number of managers a committee can oversee. Since the committee’s investment success now rests only on a handful of investment managers, the natural response is to hire “core” managers which are less likely to suffer significant relative underperformance. However, such core managers generally have limited upside, particularly in light of high fees charged for the risk taken, and this sets the pension fund’s overall portfolio on a path of unsatisfactory future investment returns.

A faulty yard-stick

Another symptom of weak governance is the elevated status past performance acquires as a yard-stick in decision making, due to a combination of limited number of managers and limited time, and therefore familiarity with each manager. Anna’s investment committee, for example, could fire an investment manager on the grounds of poor short-term performance, ignoring the possibility that this manager’s style was out-of-favor during that period.

On the flipside, pension funds can be slow to move. In the event that the key portfolio manager leaves an asset manager, it can take over a year to react and transition to a new manager. Although trustees may view this delay as the blink of an eye given their long-term mandates, the reality is that recurrent, slow-decision making across multiple managers can compound the opportunity cost over time for example in being slow to exit a failing incumbent or missing short-lived opportunities to back a new manager with limited capacity on attractive fee terms.

Overall, such poor hiring and firing decisions can end up costing pension funds as much as 2%1 as shown in the chart below.

Average value destroyed: 2%

Thinking outside the box

"Success is a process of continually seeking answers to new questions." - Sir John Templeton.

Increasing the odds of success is not easy and often requires making some difficult decisions. However, decisions such as backing skilled mangers with a limited track-record (to benefit from advantageous fee deals), investing in portfolios that look very different from the benchmark (to maximize the impact of skill), and staying the course despite short term volatility, are beyond the comfort zone of most trustees. Restructuring the portfolio to hire more managers is similarly out of question due to limited operational resources and worries over the associated potential time and monetary costs.

Research suggests that the discomfort of making difficult decisions is worth it. Better investment outcomes – additional returns to the tune of 1-2%2 per annum across the pension fund’s portfolio – are possible by enhancing governance. However, the means to do so – for instance through dedicated in-house chief investment officers – are within the purview of only a handful of multi-billion dollar pension funds. In addition, the average pension fund often has little bulk purchasing power and can rarely optimize fund management and transaction costs.

Better execution for better outcomes

We believe these governance and operational challenges can be alleviated by delegating some responsibilities. Willis Towers Watson has therefore created solutions to help solve these efficiently by providing high-conviction manager selection, portfolio construction, risk management and implementation – all in one place. In other words, governance, and all the attendant resources required to create it, are built in.

We can help improve investment skills available to pension plans because it has the depth of resources and experience to seek out skilled managers across the globe. What’s more, the ability to assemble a portfolio diverse style, philosophy and process allows us to accept only these managers’ best ideas, while managing risks at the overall portfolio level and ensuring value for money.

Besides the significant upfront research required to arrive at a high-conviction rating, having multiple touch points with each manager enables robust monitoring of the approach. Regular discussions within and between our manager research team and Portfolio Management Group bring diverse and detailed perspectives, enriching the quality of decision making. This also promotes decisive and swift action, and with the due diligence already done, in-house legal expertise and transition management on tap, the time to replace a manager can be reduced to as little as a month.

Through our investment solutions, pension funds also effectively gain operational resources, since they no longer need to spend time reviewing legal documentation, negotiating fees and contracts, operating transitions, making back office adjustments and so on. Furthermore, sustainable investment is embedded in our manager research process.

Governance as game-changer

Without good governance, precious time is spent playing the game with the wrong playbook. Identifying the real issues facing pension plans and their members goes a long way towards solving them.

We believe our investment solutions represent a highly practical solution for active equity management. Unlike the traditional advisory model, we aim to help asset owners establish a governance structure that allows them to retain control of what’s important (the overall strategy and journey plan) while at the same time, creating better outcomes by delegating the more specialist tasks.


1Jason Hsu, Brett W. Myers, Ryan Whitby, Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies, CRSP Survivorship-Bias-Free U.S. Mutual Fund Database, 1991-2013.

2Ambachtsheer, K., 'How Much is Good Governance Worth?', The Ambachtsheer Letter 245, KPA Advisory Services Ltd., June 2006.


The information included in this presentation is intended for general educational purposes only and should not be relied upon without further review with your Willis Towers Watson consultant. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical.

Willis Towers Watson and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any consequences howsoever arising from any use of or reliance on the contents of this document including any opinions expressed herein.

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