Alice: Would you tell me, please, which way I ought to go from here?
The Cat: That depends a good deal on where you want to get to.
- Alice in Wonderland, Lewis Carroll
It’s difficult to make good decisions.
Who’s to judge whether it was a “good” decision anyway? It was good for what? For whom? In what context?
We’re faced with this conundrum every day, not least in the pensions industry.
What would you do in the following situation: you are on a Trustee Board that has a limited budget of time and money; should its resources be spent on:
A. Setting the strategic asset allocation that achieves the level of expected return required to reach the scheme’s funding objective, within the risk budget?
B. Meeting, discussing, hiring and monitoring the right hedge fund manager that makes up 5% of the asset allocation?
Depending on your perspective, you might come up with A or B.
Wouldn’t it be easier to judge if more information were available, if the goals were clear? Maybe the scheme is reviewing its strategic asset allocation. Maybe the Board has the governance to focus on a hedge funds allocation. Maybe. But “maybe” is uncertainty. “Maybe” is what you say when you’re not sure; when you don’t know or don’t want to decide right now. But when markets are the way they are and the environment is volatile, this “maybe” costs time and money - the only resources a pension fund has which determines its ability to achieve its goals.
Imagine actually being on that Trustee Board and not knowing what you were trying to achieve. Having that discussion over not just A or B, but C and D and E, would be a subjective exercise. If someone is choosing ice-cream flavours, subjective is fine. Running a pension fund the same way however, is ill-advised.
But if the goals and constraints can be articulated, then the who, what, why and when - the context - to solve for the most important “how”, fall into place. If the goals and constraints can be quantified and stated in writing, all parties will be crystal clear on what to do on day one and why. The key stakeholders will have something to refer to; that is, they will have a framework.
It doesn’t have to be a thesis; there’s no reason why the pension fund’s direction, goal and route can’t be stated on a single page in no more than 200 words.
It sounds simple, it seems obvious, and yet many pension funds struggle to articulate these details in a way that isn’t....fluffy.
Which sounds more familiar?
A. The fund aims to reach buy-out.
B. The fund aims to reach full funding on a buy-out basis in 10 years’ time, based on £x contributions, X asset returns and with a risk budget of £x on a 1 year horizon.
They might both sound like the same dream, but one has a better chance of becoming reality simply because it’s been better defined.
Not knowing exactly where you want to be makes it difficult to pinpoint where you are. This is especially poignant for many funds that, in hindsight, missed the opportunity to buy-out in 2008. Furthermore, not knowing where you are
makes it difficult to decide what to do
to get to where you didn’t know you wanted to be
, and before you can say “Black Swan”, we’re in a vicious cycle, circling the plughole.
The solution is to run a tight ship. The metaphoric vehicle of choice for a pension fund is up for debate, but however long the journey, just make sure the captain knows where he’s going and give the guy a map.
Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice. Click here for full disclaimer