Outstanding Industry Contribution 2009
Anton van Nunen
Darwin Of The Pensions World
Anton van Nunen fiduciary management concept has played a significant part in changing the pensions landscape around the world as it provides the strategy and methodology for a balanced risk-controlled approach for improved returns for the future. He is also a keen lobbyist in his home country, the Netherlands, where he strives unselfishly to ensure pension schemes enjoy a smooth and rewarding regulatory regime.
With a highly regarded book dedicated to fiduciary management in English that has been translated into Dutch, German and Japanese, Van Nunen first hit on the idea as he sought a way to fill the evolutionary gap that opened up when pension schemes clamoured to move from balanced management with just one asset manager running a suite of mandates to segregated accounts where schemes brought in specialist managers to run distinct mandates.
Van Nunen was not alone in thinking a balanced manager lacked expertise and knowledge across the breadth of the portfolio. But merely splitting the portfolio and redistributing the mandates to a selection of experts who could unearth that little bit more left the portfolio in a bit of mess, with nobody taking overall responsibility to ensure the investment strategy was implemented securely and efficiently and to guide its future from an actuarial perspective.
The answer for many was to bring in investment consultants. But many found this inadequate as the consultants were not always expert enough in all investment categories. This paved the way for fiduciary management.
The principle behind fiduciary management is quite simple: it employs specialist managers but brings responsibility for the overall portfolio under one roof. This opens up a whole raft of other areas that can be seamlessly and efficiently managed, including comprehensive risk management, strategic decision-making and effective scheme governance. Many also claim that it removes the pressure from schemes to seek a merger, liquidation or shelter in an industry-wide scheme to solve their problems.
The fiduciary offers expertise and a commitment to the overall management of the plan, not just the investment management. This typically includes asset/liability studies, balancing risk and return considerations, and ensuring the scheme diversifies as efficiently as possible.
Pensions boards, which in general have limited knowledge of and experience in investments, use ALM studies to take responsibility for a neutrally defined risk budget. Van Nunen argues this should be drafted in a jargon-free manner. Considerations will include the maximum probability of having a certain amount of underfunding. The fiduciary can use this verdict to translate it into investment terms, guiding the choice of asset classes, their benchmarks and the level of active policy.
After the board has outlined the broad issues associated with investing, it can formulate the investment approach as a top-down construction of assets among a set of asset classes, with sub-allocations within some of them and possibly supplemented by active and dynamic management. The fiduciary achieves an optimal degree of diversification and he or she manages portfolio risks in combination with, not merely with respect to, liabilities, using state-of-the- art models for dealing with the various correlations as they occur over time.
Van Nunen stresses the fiduciary brings a holistic approach, so that the plan sponsor can still see its target within the complex calculations and decide on which asset classes to use and how much to allocate to them. These strategic decisions cannot be delegated and they determine to a large extent the outcome of the investment process.
This is a very important exercise as, with the introduction of stringent funding regulations, pension funds tend to match assets and liabilities. Van Nunen believes legal compliance is fast taking over from the notion of generating higher returns. But this need not be the case. By adequately calculating risk to match high investment aspirations, serving members can replace appeasing scheme decision-makers. As fiduciary management oversees the actuarial as well as the investments, then Van Nunen says this is now possible.
With a strategy in place, the fiduciary proposes specialised managers to begin investing. He or she should know all the relevant managers and use the necessary data to select and combine them efficiently in sub-portfolios, thus raising the information ratio.
Once the board has approved the portfolio and contracted the managers, the fiduciary monitors the portfolio by measuring risk and return at manager, sub-portfolio and overall portfolio level. Transparent reporting on the basis of custodians’ data is a prerequisite for enabling the sponsor to evaluate the achievements in terms of return and risk. The fiduciary provides management information and more in-depth reports to specialists who may understand all the intricacies of the results better.
The detailed alternatives in construction, active and passive policy, overlay procedures, hedging currencies and liabilities, which are often based on complicated calculations, may require the plan sponsor to receive some training. Employees want secure assets but higher benefits, the sponsor wants low risk but low contributions, investment managers claim to generate high returns and low risk and advisers claim to have solutions for all kinds of problems. A fiduciary can educate the relevant executives so that they can make the right decisions on all these issues.
Some critics assert that fiduciary management resembles existing models such as multi-management and implemented consulting. However, looking at the breadth of tasks of the fiduciary, it is obvious that fiduciary management is more than multi-management, which only has one corresponding characteristic and not even the most important one. The construction of an efficient portfolio, in the sense of producing maximum returns given the risk budget, is far more important and multi-management is not part of that structure.
Fiduciary management, therefore, is a management model in its own right and one that is fast changing the way pension schemes view the way their investment process fits in with their overall organisation..
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