DC plans must look at governance and design

Towers Watson’s Roger Urwin and Gordon Clark from the University of Oxford are finalising their fourth collaboration on global best practice for defined contribution plans. Amanda White spoke with Roger Urwin about the inefficiencies in plan design.

The financial crisis highlighted a lot of inefficiencies in investment markets and the strategies used by pension funds around the globe. The bulk of attention has been directed at asset allocation, asset correlations, liquidity and the role of alternatives. But Roger Urwin. Towers Watson’s head of global investment content – a role that contemplates investment strategy from the clients’ perspective – believes an equal amount of attention should be directed at governance and plan design.

“Pension funds can’t be effective without good plan design, and that’s not settled yet,” he said. “Plan design refers to how the fund works which includes daily dealing and pricing and a lot of those structural points are not settled yet. This is a multi-year type of evolution.”

He says there are many “cracks all over the world” and US public pension funds are one of the more obvious.

Urwin and Professor Gordon Clark, from the University of Oxford, are writing their fourth paper on global best practice for defined contribution plans which looks at governance and plan design.

Urwin believes the biggest thing that has to happen is a change in the mindset of pension funds to “investing through retirement not to retirement”.

“When you look at it this way, the key thing about defined contribution plans is they don’t have a cohesive framework between the member and the investment of pension funds.”

He says this lack of engagement between the two creates a problematic investment delivery.

“The individual member doesn’t have the financial sophistication to get an outcome they have trust in. Funds can communicate but the member mightn’t be listening or understanding enough. People are struggling with the super fund proposition, it is [a] counter-intuitive type offer.”

To this end Urwin is an advocate of the “nudge principal” or auto-enrolment, so that members have to opt-out not opt-in.

“This is a multi-year evolution to the culture to enable stronger super fund behaviour and better member behaviour.”

Linked this is better governance in the investment team, which for most funds is a combination of the executive team and investment board.

He questions the quality of the non-executive members of pension fund boards, and quotes Jeremy Cooper, chair of the review into the governance, efficiency, structure and operation of Australia’s superannuation system, who believes pension fund boards should have the same tests as corporate boards.

Urwin, who has been at Towers Watson, or more accurately Watson Wyatt, for the past 20 years, recently stepped down from his position as head of the group’s think tank, the “thinking ahead group”.

He will continue in his role as head of global investment content but will also take up a two-day a week advisory position at MSCI Barra.

Fellow-founding member of the thought leadership group, Tim Hodgson, will take over as head of the group which over the past eight years has explored pension fund issues such as risk budgeting, extreme risks and governance.

While focusing on broad investment research, Hodgson’s papers include investment efficiency, and he is a member of the global investment committee.

“The industry has so many interesting dimensions to it, to be able to operate with several different perspectives is fascinating,” he said. “People who know me know that this is not a winding-down, taking this particular challenge. Risk management is at a fascinating point, it needs to become more sophisticated.”

Urwin has been head of investment content since he handed the global head of investment consulting baton to Carl Hess in July 2008, a position he had held for 13 years.

His position as head of investment content is an “individual” or “free-ranging” role and external to Towers Watson, Urwin is also a member of the CFA board.