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The case for delegation just got stronger


By Pieter Steyn | June 28, 2018

Pieter Steyn examines the growing shift toward delegation within the pensions space as many boards seek to manage return and risk.

Pension committees do not often operate at optimal levels of governance. Many plans have muddled through with suboptimal structures, resulting in poor outcomes for participants. With a number of changes in the pensions environment, this could only get worse.>

But there is a solution that challenges traditional leadership models and sharpens the competitive edge.

The base case for delegation

To understand how delegation might work, consider the role of the board. It is to promote strategic dialogue and conduct disciplined oversight. Boards that are too involved in the execution of strategy may compromise their ability to effectively oversee their investments.

The largest funds can achieve a separation of functions by building in-house executive functions, but for most funds, separation can only be achieved by delegating investment activities. The outsourced CIO model — or OCIO — allows the board to stop spending all its time picking fund managers and to strengthen their oversight role instead.

It also offers two great competitive advantages: scale and scope.

Scale may allow for the aggregation of plan assets and allow for the creation of true buying power, while greater scope offers access to a wider range of strategies and skills. We believe traditional governance models only allow boards to achieve improvements sequentially, while the OCIO model allows for multiple improvements at the same time. The traditional model is a local road: the OCIO model is a freeway.

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