The explicit cost of outsourcing
versus the implicit cost of not
Speakers
Michael Coletta
Shamindra Perera
Hilton UK Pension Plan
Russell Investments
Chair
Sue Timbrell
NAPF Investment Council
Sponsored by
National Association of Pension Funds
Media partner
Fiduciary management: Can you afford not to?
• The traditional pensions’ governance model has imposed a high cost
of deficit contributions on Sponsors
• Fiduciary Management can significantly reduce the cost of
contributions without materially increasing fees
National Association of Pension Funds
Explicit costs
Traditional model fees versus fiduciary management fees
• For a sample scheme size £250m
Traditional
Fiduciary Management Fee
Advisory Fee
0.15%
Overlay Fee
-
Fiduciary
0.25%
Growth assets
0.75%
0.61%
Liability matching assets
0.20%
0.20%
0.53%
0.45%
0.68%
0.70%
Asset management Fee
TOTAL
National Association of Pension Funds
Source: Russell Investments, for illustration purposes. Fees based on E&Y fee survey median for fiduciary fees, and traditional fees
for a standard DGF and LDI strategy, total asset fees based on 60/40 allocation. Advisory Fee based on Spence Johnson Survey.
Implicit costs
Traditional management outcomes versus fiduciary management outcomes
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
70-30
DGF + LDI
Dynamic
Over funded:
No value to Sponsor or Trustees
Under funded:
Costly, try to minimise
10%
20%
30%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
130%
135%
140%
145%
150%
155%
160%
165%
170%
175%
180%
185%
190%
195%
200%
% of Outcomes
Stochastic Simulation
Funding Level (after 10 years)
National Association of Pension Funds
Source: Russell Investments, for illustration purposes.
Assumptions: Assets £80m; Liabilities £100m; Funding Ratio 80%; Return 3%; Funding Ratio Volatility 10%
Fiduciary management
A governance structure to deliver better outcomes
Manage
Plan
Investment
objectives, strategy and
guidelines
Portfolio design,
manager selection and
implementation
Trustees
Decide
Oversee
Fiduciary Manager
Advise
Decide
Underlying investments
selection
Asset Managers
Decide
• Trustees focused on objectives and strategy
• Fiduciary manager fully accountable for management
Trustees fully in control through accountable delegation
p.6National
Oversee
Association of Pension Funds
Hilton
A case study (1)
35% Allocation to Matching Portfolio
65% Allocation to Growth Portfolio
51% Equities
24% Credit
7% Real Assets
18% Absolute Return
Global Equities
Regional Equities
Emerging Equities
Investment Grade Bonds
High Yield & EMD
Commercial Real Estate Debt
Commodities
Listed Infrastructure
Cash Benchmarked Strategies
Cash
5%
13%
34%
3%
4%
2%
7%
28.5%
Index Linked
Long Dated Gilts
14%
15%
71.5%
2%
• Current portfolio diversified, using over 65 different specialist managers plus direct
holdings for exposure management
p.7National
Association of Pension Funds
Source: Russell Investments, for illustration purposes. Data as at 30 June 2013.
Hilton
A case study (2)
•
•
•
•
•
•
•
•
•
Defensive positioning of portfolio increased through the year
24 manager changes so far this year
Commodities added (March)
Addition of absolute return bond strategy (April)
Implementation of effective equity hedge (May)
Increase in European exposure within equity component (June/July)
Increased allocation to Global High Yield (July)
Rolling of equity hedge position (August)
Reduction of Investment Grade Credit allocation (August)
p.8National
Association of Pension Funds
Source: Russell Investments, for illustration purposes. Data as at 30 June 2013.
Evolution of Hilton’s mandate
Flexibility to allow different levels of delegation
Past
Present
Future
p.9National
• Delegate manager selection and portfolio construction
• Narrow bands of deviation from benchmark
• Delegate asset allocation of Growth portfolio within guidelines
• Remove constraints on leverage in Matching portfolio
• Delegate funding level based risk allocation
• Create Journey Plan to achieve funding objectives
Association of Pension Funds
Potential increase in delegation for Hilton
The benefits of total portfolio management
Increase liability hedge
Introduction of equity
downside protection
78%
76%
74%
Increased
liability
hedging
72%
70%
Introduction of
equity
downside
protection
68%
120
66%
115
0
-0.1
-0.2
110
-0.3
-0.4
105
-0.5
100
-0.6
-0.7
95
Real Yield (Swaps)
Index Level
Level Equities)
Index(Global
Funding
Funding
LevelLevel
80%
-0.8
90
Dec 12
-0.9
Jan 13
Global Equities
Feb 13
Mar 13
Apr 13
May 13
Jun 13
Jul 13
Aug 13
20 Year Real Swap Yield (RHS)
Holistic Scheme management means considering exposures across all assets, not discreet portfolios
National Association of Pension Funds
p.10
Source: Russell Investments, Bloomberg LLP, Barclays. As at 13 September 2013.
Global Equities as represented by The MSCI World TR Net Dividends Reinvested Index (in GBP) rebased to 100 as at 31 December 2012.
Governance
Time & Focus
Resource
Known unknowns
Real time management
Control
National
p.11
““
““
“
We spend our time on the important decisions
We have many more specialists working for us
than would otherwise be possible
The decisions we were unaware of before, are
now proactively taken or delegated
By delegating day-to-day management, decisions
are taken swiftly and in real time
This structure gives us more control over our
Scheme’s overall outcomes
Association of Pension Funds
“
““
““
The non-financial benefits
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