A rigorous governance process needs to be at the top of investors’ minds if they wish to have a portfolio management approach that is versatile enough to adapt to changing investment environments and still provides sufficient accountability, according to three prominent pension investors from Canada, the US and the UK.
Despite pension markets’ varying levels of maturity, the Top1000funds.com Fiduciary Investors Symposium in Toronto has heard the goal of combining portfolio resilience with meeting fund objectives is the same, and it can be achieved through different manifestations of governance structures.
The State of Wisconsin Investment Board (SWIB) head economist and asset and risk allocation chief investment officer Todd Mattina said governance plays an important role in setting the overall fund objective.
SWIB has close to $150 billion in assets under management, of which the majority is the Wisconsin Retirement System, which funds approximately 667,000 participants – or one in 10 Wisconsinites, to put the number into perspective.
The fund’s liability is dividend-based – a pensioner receives a benefit on retirement, then accrued dividends over time – and the dividends are a function of SWIB’s average rate of return, Mattina said.
“There’s a risk-sharing that involves the pensioners and the system. This has allowed us to keep the system fully funded over time, which is quite unique Stateside,” he said.
“To the extent that we make average returns over a discount rate that’s set in the law, our pensioners receive dividends. To the extent that we have average returns below that key threshold, we actually claw back benefits.”
To that end, SWIB has the objective of achieving a long-run rate of return of 6.8 per cent a year to keep the system fully funded and provide a stable dividend.
“Our asset allocation has an explicit allocation to policy leverage, which is currently 12 per cent of the fund. That’s approved by our board just like the allocation to public equities and private markets.
“What that allows us to do, essentially, is achieve our 6.8 per cent target rate of return while [being] able to leverage up a more efficient portfolio, which includes a significant amount of fixed income – we have 19 per cent allocation to TIPS [Treasury Inflation-Protected Securities] – and gives us some of the resilience factors.”
Accountability first
Meanwhile, the UK’s Local Pensions Partnership Investments (LPPI) chief investment officer Richard Tomlinson said for him, one of governance’s crucial roles is providing accountability in investment teams.
LPPI is a part of the bigger Local Government Pension Scheme (LGPS). In 2015, the UK government began a process that saw individual LGPS funds (state and local authority pension funds) gathered into larger pools for purposes including cost reduction, and created seven consolidation vehicles, of which LPPI is one.
LGPS collectively has £360 billion ($400 billion) in assets and 91 underlying funds, and LPPI manages approximately £25 billion ($32 billion) and has three clients.
“We have a formal way [of governance] in the UK… which is the three lines of defence model so that the risk function does not report to me as CIO, it’s segregated through a CRO [chief risk officer] and we try and work in partnership,” he said.
“The governance very much runs through how we operate from the way we’re structured.
“For our clients, they know who’s accountable for their portfolio performance, which is basically myself and the investment team, as opposed to some other pension structures where you have this fragmented governance structure where it’s not always clear where accountability sits.”
Tomlinson said he has been enjoying the different lenses this governance structure brings to the portfolio.
“I really like having a segregated risk function, who think completely differently to me, because I’ve worked in places where the biggest risk factor has been the grouping of the lead PM or the CIO,” he said.
“You find they’ve built all the models, they’ve built the risk architecture, and there’s a glaring commonality of the way they’ve built it.
“It leaves you open to a certain assumption, so having that diversity of thought and model to me is really, really important.”
Tomlinson said of the seven consolidated vehicles, LPPI is the one closest to the Canadian model – this is in relation to internalisation, access to private markets and the fiduciary model.
Forms of independence
However, even within the Canadian model there are differences in governance models. British Columbia Investment Management Corporation (BCI) vice president and head of investment risk Samir Ben Tekaya said the fund, unlike its Maple 8 peers, doesn’t have a standalone CIO.
BCI has C$233 billion in assets under management and 80 per cent of that is from pension clients; the rest consists of insurance company money. Over the past eight years, Ben Tekaya said BCI has been internalising more assets and moving into more complex strategies.
“One of the bases [of the strategy] is investment process governance, but also risk management,” he said.
“We don’t have a CRO per se. We have me, I’m head of the investment risk, which I report to the head of strategy and risk, which is portfolio construction. Our CEO is the CIO.”
BCI operates with a dual-accountability model which makes it accountable to both clients and the BCI board. The seven-member BCI board consists of four directors appointed by four largest pension plan clients and three are appointed by the Minister of Finance (two of which need to be client representatives).
“So some people ask governance-wise how independent we are, Ben Takaya said.
“But I think at the same time, if you have the right governance, the independence is there – we don’t need to be independent in terms of reporting, et cetera.
“You have the governance, you have the exposure to the board of the client, and the BCI board. But what helps is we are the same group as the portfolio construction and asset allocation, and it really helps to have the culture of risk there.”
