Pension funds across the world are increasingly being exposed to "raw risk" in the sheer length of time it is taking to transition assets from one investment manager to another, claims an arm of BNY Mellon.

Mellon Transition Management (MTM) says that changes which typically took place over a fortnight before the onset of the financial crisis are now taking up to one year to complete.

Mark Keleher (pictured), CEO and founder of BTM told Pension Funds Insider that schemes are running the danger of "staying with the wrong asset allocation and incurring real opportunity costs."

He revealed that an unnamed UK pension fund client had lost 4.6% of a mandate's value whilst waiting from October 2010 to February 2011 to gain legal approval to transfer a substantial amount of assets from the UK to the US. Given the trend in geographically diversifying assets, this kind of transaction is fairly common.

"While that could go either way, as a pension fund you only want to bear risk if there is an associated reward. The risk of a delayed implementation is raw risk, pure and simple," Keleher explained.

Keleher added that "having lived through the financial crisis we are now in the guts of a regulatory crisis, with the regulations changing but we don't know to what exactly, as yet". The wait for the Dodd-Frank Act's regulations to be fully defined is a "big thing hanging over the head" of many US schemes by increasing legal scrutiny of asset shifts and therefore prolonging the time it takes to have contracts drawn up and signed off, he said.

As well as the delayed implementation times, investors are also taking longer to make decisions as they wait  for uncertain economic trends to settle.

New York-based Keleher says that transition times have been lengthening in the UK to a similar extent as the US.

Well-funded pension funds once made straightforward manager changes but "a wrenching period in the past few years has left schemes still struggling with the asset allocation implications" according to Keleher, and left them facing an increasingly dynamic set of choices.

"Whereas we used to play chess ten years ago we are now playing three-dimensional chess" adds Keleher. 

First published: 02.06.2011

dbillingham@wilmington.co.uk