British Airways, BAE Systems, Royal Mail, Centrica, National Grid and Kier are among the big-name UK organisations that have opted for the outsourced CIO model to oversee their multi-billion-pound pension arrangements, and with the market expected to grow to USD3 trillion by end of 2026, we can expect many more asset owners to follow suit.
Last month BAE Systems appointed Goldman Sachs as OCIO for its two defined benefit (DB) pension funds worth GBP23 billion, marking the biggest ever deal of this kind, and are demonstrable of an overall move by pension behemoths into the market.
Toby Goodworth, Managing Director, Head of Liquid Markets at Bfinance, says: “The OCIO model, which historically been favoured by small and medium-sized organisations with very limited internal resources, is now attracting larger investors.”
He continues: “The level of complexity of mandates has increased over time – and it’s not just investment complexity, we are seeing operational complexity, regulatory complexity as well as ESG reporting requirements. As soon as you move towards more complex portfolios, you need to increase the size of the investment team and add other resources. For some investors that that’s just not desirable or feasible.”
Goodworth adds that there is also a trend to move away from internal investment teams, which is demonstrated by the transfer of internal pension desks to the OCIO provider in several cases including those at Centrica and BAE systems.
Chetan Ghosh, who was the CIO at the Centrica Pension Schemes before they outsourced to Schroders Solutions and is now the provider’s Head of Group Pensions and Investments, says: “Since onboarding, Centrica has been able to benefit from the vast intellectual investment resources that exist at a fund manager, for example for training, direct practitioner insight, and strengthened management information/risk oversight for the portfolio.”
Similarly, Duncan Willsher, a professional trustee at Vidett and Chair of the GBP 830 million Northumbrian Water Pension Scheme which appointed Cardano as OCIO in August, says: “We wanted an OCIO who could offer a sophisticated strategy, flexible implementation and a collaborative approach to working with the scheme’s stakeholders and other advisors.”
But while appointing an OCIO may relieve some of the burden facing asset owners with complex investment strategies, Goodworth says It can be challenging to establish suitable governance arrangements given the shared responsibility for elements of strategy and the hybrid front/ mid/back-office service combination.
And given the potential conflict of interest in cases where the OCIO offers asset management or investment consulting services, asset owners must be particularly careful in crafting the mandate.
Goodworth says: “Manager research experience in this sector indicates that service-level independence can be achieved irrespective of the size and complexity of the organisation. Yet investors should handle the subject with care and keep an eye on direct or indirect linkages with either internal products or certain external asset managers. There may be some positive aspects to using internal products, such as potential fee savings, but there needs to be a very clear division of services, teams, management and incentivisation.”