By Ruth Alexander Multinational pension funds need to adopt a more global approach but most are ove...
By Ruth Alexander
Multinational pension funds need to adopt a more global approach but most are overly restricted to their domestic market by inconsistent investment measures, according to Watson Wyatt.
The pension consultant said these pension schemes need to define manager structures according to simple, globally consistent measures in order to provide a consistent investment strategy for all pension plans.
Chris Ford, a senior investment consultant at Watson Wyatt, New York, said two obstacles in particular stand in the way of moving towards a global approach: differences in governance practice and the lack of a common investment language.
Ford said: "We all continue to strive for the ideal pooling vehicle, which will let multinational companies build efficient manager structures that can often be used cheaply by plans in many countries.
"We suggest that as much as 90% of the gains can be obtained from adopting a common investment language and moving to a consistent approach to asset allocation and manager structure: something that can be done now, without waiting for governments worldwide to agree on the legal status of pooling vehicles."
Ford said the globally consistent pension manager structure measures should be risk, return, cost and what he terms a "fiduciary comfort level."
Ford said: "If multinationals wish to design a single structure that can be applied by each country, they cannot use language that is specific to any one country. They also need to recognise that investment decisions are often based on non-financial factors such as comfort and familiarity, as well as financial factors such as relevant experience and resources.
"Any structure that does not allow local fiduciaries to retain sufficient control to make them comfortable with their fiduciary risk is almost certainly doomed to failure."
Ford said the manager structure should consist of three layers, each of which is distinct and understandable on a global basis: a passive core, an active core and active satellite funds and managers.
The passive core would incorporate index-tracking managers giving low cost solutions, with a low monitoring burden and good economies of scale for a multinational. This core would contain domestic and global bonds and equities.
The active core, would consist of low risk active managers with strong brand names, providing good comfort levels, in local markets. Ford said the active core would be unlikely to produce high levels of excess returns after fees. Domestic bonds and domestic equities would be allocated to this core.
High risk managers, likely to produce good returns after fees, would make up the active satellite portion. Ford said: "The active satellite, which would contain global equities and bonds, would provide limited comfort for local fiduciaries and impose a significant monitoring burden."
Watson Wyatt believes this asset allocation model would give fiduciaries significant discretion over the selection of active core managers for domestic assets. Ford added: "These managers would provide the necessary comfort level to the structure and would fit in with local operating practices, for example splitting managers by capitalisation and style in the US, and using a local bank in Japan."
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