OCIO – New Idea or Not

CRA, FSCO, PBGF, LCBO….we love our acronyms in the pension industry.  Here is a new one – OCIO – which stands for Outsourced Chief Investment Officer.  Because we don’t give investment advice I don’t always pay attention to the changing landscape in the investment side of the business.  With so much talk recently about OCIO and ‘delegated solutions’ I thought I would invest some time in spelling out what is new and what isn’t as new as the people selling these ideas would like you to believe.

Pension Investing 101

To start, we have to backup to the Chief Investment Officer.  Investopedia defines the CIO as an executive responsible for managing a company’s investment portfolios, including pensions.  The CIO is not a new idea – companies with large pools of investments have long had someone in charge, often with a team of professionals underneath doing the heavy lifting of figuring out what investments are most appropriate.

In the defined benefit (DB) world of pension plans sponsored by a single employer – the risk and reward of pension investing accrue to the plan sponsor.  In addressing the investment challenge in the past, some businesses have left the CFO to oversee external investment managers while other businesses organized pension committees to do the job.  Pension committees were sometimes at the board level, sometimes at the executive level and sometimes at the staff level.  The range of investment expertise on committees ranged from expert to none – with the idea that those without investment expertise would bring other skills such as plan design or plan administration to balance out the expertise of the group.

The Investment Challenge

In the last decade or two it has been increasingly difficult to generate double digit investment returns – something that anyone with a pulse seemed to be able to do in the 1990s.  In addition, pension funds that were once immature and small compared to payroll have grown to a size that cannot be ignored.  This changing landscape has sensitized many executives to the responsibility of investing pension funds that have reached hundreds of million or billions of dollars.  These responsibilities have moved to higher levels within organizations and in some cases, executives are declining to sit on pension committees or manage external providers where it is outside their comfort zone.

With declining expectations in investment returns and an industry shift to defined contribution (DC) pension plans, investment oversight has grown in complexity.  While complexity is rising, the shift of the risk-reward trade-off from sponsors (DB) to plan members (DC) has heightened awareness of the fiduciary duty that sponsors owe plan members.

Confronted with the reality that there are significant assets at risk, an increasingly complex world of investments, and a better understanding of fiduciary duties and the litigation that can arise when failing to properly discharge that duty, organizations are looking to transfer the investment challenge to an outside agency.  Thus, the OCIO emerges.


But wait, haven’t organizations been outsourcing investment decisions to outside managers since at least the 1950s?  The answer is yes – organizations have long sought counsel from outside investment experts to select and monitor investments for the pension fund.  What has changed is who is accepting the fiduciary duty for the decisions that are made.  In both the DB and the DC world sponsors have often hired ‘investment consultants’ to help them navigate the decision process on which investment managers are in and which investment managers are out.  Investment consultants typically give recommendations – but the decisions were largely left with the sponsor as were the responsibility for the outcomes.

So how does outsourcing the investment decisions work?  For DB, hiring an OCIO means the investment committee sets the investment policy and then turns over the day-to-day tactical decision making to the external manager.  The two key benefits of this approach are putting the decisions in the hands of industry experts that spend all day every day thinking about investments and gaining the speed of decision making that comes from daily monitoring in contrast to quarterly investment committee meetings.

For DC there is a bigger win here for the sponsor.  Since the sponsor doesn’t get the investment gains accruing from good decisions but gets all the negative public relations and potential litigation accruing from bad decisions, finding a ‘partner’ to take responsibility for the investment decisions and stand first in line if there are complaints about the investment menu is something of value.

Buyer Beware

Before you run out the door to delegate the entire investment decision to an OCIO let me provide two notes of caution.  First, the industry, like any other can be fraught with conflicts.  Some OCIO providers also offer proprietary investment funds.  With these types of arrangements care must be taken when the OCIO is choosing their own investment funds to make sure it is being done entirely for the interest of the client.  Proper disclosure can help with this concern but disclosure cannot entirely eliminate the bias that can arise with these situations.

Second, no matter how much responsibility a plan administrator delegates to any agent or service provider, the responsibility to monitor their actions remains with the plan administrator.  As fast as you can delegate these responsibilities to eliminate the need to manage them directly you must immediately look to how your system of governance will provide competent and timely oversight.



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