More pension schemes are now outsourcing the management of their investments to wealth managers such as BlackRock to handle market volatility.
Sion Cole, head of UK OCIO Business, BlackRock, told Money Marketing he has seen a significant growth in the outsourced chief investment officer (OCIO) market for pension schemes.
This is particularly true for those schemes that guarantee income levels for their retirees.
Cole said many pension schemes face challenges building investment portfolios capable of returning them to full funding levels to meet their liabilities.
And many are trying to protect themselves after the market turbulence towards the end of last year that saw UK gilt yields drop.
Pension schemes that used a liability-driven investment (LDI) approach were hit hard forcing them to dump bonds to meet collateral calls.
He said this market volatility has led lots of trustees to look at their governance arrangements and ask themselves questions about how to deal with future market turbulence.
The answer for most is to call in the professionals with the expertise and technical knowhow such as BlackRock to manage their investments.
“They think they would be better off endorsing the investment arrangement of outsourcing to a professional chief investment officer (CIO) because they are better able to deal with market volatility,” he said.
Cole, who oversees BlackRock’s work with pension schemes, said the other trend is the size of the pension schemes that outsource.
“You’ve seen this from the likes of British Airways, Royal Mail, that have outsourced their investments to BlackRock. Those schemes will outsource assets of up to £10bn.
“We have got these huge firms outsourcing that’s been a trend that has taken hold in the past three years. If we go back a little bit further [in time], the majority of schemes that outsourced were between the medium and mid-sized market cap of under a billion.”
Earlier this year, the Royal Mail Pension Plan with assets worth £8.8bn was outsourced to BlackRock. The wealth manager also manages £21.5bn for British Airways’s pensioners after the fund was outsourced to it 2021.
Cole said he believed the outsourcing trend for pension schemes will continue as the economic climate worsens.
“There are still large number of schemes that are probably looking at outsourcing going forward.
“You shouldn’t underestimate how big a shift that has been. Because fiduciary management of OCIO has been around in the UK now since 2009/10. We are talking in excess of 12 years.
“And it has been in the last three years we have seen this shift to this mega firms outsourcing that is really significant because it’s very unlikely that those schemes would ever go back from outsourcing.”
