About a year ago, as financial markets were down—or so we thought at the time—I was writing on the importance of proactively communicating with and educating employees on how to invest and keep a long-term view (if you feel your employees are nervous, I urge you to go back to that column). This year, however, I am seeing some sponsors and pension committee members getting nervous themselves, sometimes questioning their choice of investment options and fund managers.
(Seemingly) persistently bad markets
Blessed with fantastic returns on Canadian equities for a few years—not so much on the global front, though—it now feels like it has been a while since markets have performed well. In fact, we are probably looking at a negative return year at this point. In this context, while disgruntled long-term investors (i.e., those mostly invested in equities) are getting educated, sponsors and committee members are starting to feel the heat.
This is even truer of employers who have moved from defined benefit to defined contribution at a time where then recent returns had been fairly good, which allowed projection and decision-making tools (and targeted employees using them) to be optimistic about the future. But nowadays, projections are not looking as rosy as before for anybody.
In this context, should you be concerned as a sponsor or pension committee member? Is it time to fire some managers the way football coaches are sometimes tossed?
Back to your SIPP
I see a certain number of clients concerned with the investment options available to their plan members and looking to change some managers. In certain instances, these managers would actually get fired for doing exactly what they were hired to do. A good example is value-style equity managers, who in general have been paying the price dearly over the last few years in terms of performance, and are sometimes being challenged for it.
Such reactions, albeit entirely understandable, should be avoided. If you’re responsible for overseeing a CAP you should have formal processes in place and make decisions based on rational and well-defined criteria—which is precisely what your statement of investment policies and procedures (SIPP or investment policy) should help you do.
A well-designed SIPP will provide guidance as to when to make changes, provided, among other things, that it:
• was derived from the sponsors’ own investment beliefs and objectives;
• takes into account the specifics of the plan members’ demographics;
• clearly defines the investment option structure (i.e., number, category and investment style of the options to be made available to members);
• sets unbiased and measurable performance and other criteria; and
• defines what actions are to be taken when the preceding criteria are not met
Now, many sponsors say they are monitoring available investments as they receive regular rate-of-return information from their record keeper, including the returns of corresponding indices or benchmarks for each investment option. In our experience, this limited monitoring has proven to be insufficient as it is as likely to generate undue dissatisfaction with managers just doing their jobs than to create over-satisfaction with managers who may have seen dramatic changes (such as key investment professionals leaving the firm) without it being clearly reported.
The criteria set out in the SIPP should then cover all factors that should be used to monitor chosen managers.
To-do list
If you feel you are in a similar situation, go back to your SIPP (hopefully, you have one at this point) and look for the key points mentioned above. Ensure that you have access to all the necessary information, from an unbiased source, to adequately monitor your investment offering. Then, and only then, you will have in hand what it takes to make rational decisions. You may actually find that it has become urgent to do…nothing.