Pension asset growth masks asset owner governance challenges

In the past decade the world’s largest 300 pension funds have grown by over 50% and now total US$15.7 trillion, representing over 43% of global pension assets. While this is solid aggregate growth, especially as it coincides with the recovery period of the world financial crisis, it masks the challenges these systemically important funds will face in the next decade. How they organise themselves to search for attractively priced assets, at acceptable risk, will shape their fortunes and their ability to meet respective missions and objectives.

During this time, we have seen a plethora of investment strategy innovations undertaken by the investment community, while uncertain and often volatile outlook in capital markets have played on asset owners’ minds. These strategies have sought to maximise and optimise outcomes through, for example, new approaches to risk diversification. However, there is a growing recognition by those at the forefront of industry thinking that an ability to adapt to a fast-changing landscape is critical, and that this is best achieved by sharing and implementing best-practice. Funds which are able to demonstrate more effective decisions through improved cognitive diversity and board-executive engagement, combined with better sustainability and risk management, are the ones emerging as leaders at the vanguard of the global asset owner industry. In brief, self-awareness is emerging as central to the evolutionary success experienced by the world’s leading asset owners.

These characteristics were highlighted in our recent research, sponsored by the Future Fund, entitled Smart leadership, sound followership. In it we sought to benchmark and compare practices across 15 world-leading asset owners, chosen from the North American, EMEA and Asia-Pacific regions and based on their global reputation, strong governance, significant size and thoughtful, outward-looking perspectives. Other findings of the research include:

  • The importance of cognitive diversity – research is revealing that biases in investment decision-making settings are more numerous and deeply embedded than investors readily recognise. Using diversity effectively can help in reducing the impact of biases

  • Sustainability and long-horizon investing is currently too shallow – sustainability is a critically important emergent subject, yet opportunities are being missed in the overlapping areas of sustainability, ESG, stewardship and long-horizon investing

  • Boards are having trouble being strategic – boards seem strong in interpreting their fund’s mandates and in ensuring executive accountability, but less so in their development of a strategic dialogue with their executive. This is work in progress, revealing an opportunity for organisations to improve

  • Risk management is key as the business landscape is changing – to manage risks there is merit in scenario analysis. Studying the investment ecosystem, not just the markets, is critical to anticipate some transformational changes ahead

  • Funds are evolving their mix of internal and external intellectual property – there can be a better grasp of how to optimise the value chain, including the nature of external strategic relationships. Technology and increased sophistication make network opportunities across funds potentially more valuable than ever.

The overriding lesson from this study is that self-awareness and cognisance of peer groups has played an intrinsic role in the evolution taking place across the world’s leading asset owners. We believe that this will only become more important in the future, particularly given the scarcity of investments that meet the current risk and return targets of many funds.

If asset owners are to repeat the growth attained in the last decade, it is imperative that they continue to expand their skill-sets, particularly in a continued lower return environment which looks set to remain a feature of the industry going forward. Leader funds have set themselves apart through their ability to innovate, rather than to rely on practices which may have worked in the past. This will be a particularly desirable characteristic for all asset owners in the decade to come.