A host of companies are helping pension funds to capture and understand their investment costs using the Cost Transparency Initiative (CTI) templates. And now, suddenly, everyone’s attention has turned to benchmarking: because, after all, what else are you going to do with the data once you’ve collected it? I worry that in the current melee there’s a real danger that funds will miss what’s important in good benchmarking, and they’ll end up knowing the cost of everything but the value of nothing.
After years of comparing the cost of managing the world’s top pension funds, one of the key lessons I've learned is that cost is interesting and fundamentally important, but what’s really necessary and valued by funds with is insight, and by that I mean meaningful insight that might lead to change.
Funds want to understand if their costs are reasonable; and want an insight into how the world’s top pension funds to see how they are managed. To put that into context, the boards we present to want answers to three tough-to-answer questions:
1. Are our costs reasonable?
2. Are we getting value for money?
3. Are we becoming more efficient?
Answering these questions is what emerges from the process that reflects the science of benchmarking. The art then is to bring the analysis to life and provide the context and stories that sit behind this data. These stories are central to truly engaged boards and management teams, helping them to learn and explore in detail what other funds are doing, where and why they’re different and what, if anything, they need to change. Boards in particular don’t want to be, nor should they be, bogged down in the detail of ‘the weeds’.
When done well, benchmarking shines a light on the decisions taken and the outcomes achieved by all those tasked with running a pension scheme. This includes board members and the executive team, as well as their appointed advisers, fund managers, etc. Sometimes this means standing in front of a board and telling a difficult or disappointing story, and sometimes bringing it right back to the people in the room. To tell these stories –
particularly to strong characters with an even stronger vested interest - you need certain things:
1. High-quality data from a broad cross section of the right kind of comparators
2. A robust methodology
3. Highly developed personal skills - credibility, sensitivity and the ability to provide insight
In effect, what you are doing is holding a mirror up to the pension fund and helping those responsible for running it to make sense of what they see. The strategy and objectives of the fund need to be understood. A fund may have high costs for very good reasons and its strategy may have been implemented effectively and efficiently. That story needs to emerge. It’s equally important though that the storytelling brings in examples of other funds that have succeeded or failed in similar circumstances, helping everyone to better understand the context and draw appropriate conclusions from which to make decisions.
The CTI templates will help pension funds to better understand and negotiate their fees with their managers, but for those seeking better outcomes for their members it’s the unearthing of the stories behind the data collected from the CTI templates that is the crucial next step.
John Simmonds, Client Relationship Manager, CEM.
