UN Pension Fund – Outsourcing investments. Virtual global townhall.
Informal/unofficial summary
The virtual global townhall on outsourcing investments in the UN Pension Fund, hosted by CCISUA, held on Monday, 28 February 2022, may have raised more questions than it answered.
The following is a brief summary (not endorsed by CCISUA), with an ‘overview’ and ‘discussion points’. Fund members are encouraged to view the video attached to obtain a full account of the briefing. A transcript is available (not attached).
The meeting was chaired by CCISUA president, Prisca Chaoui (the Coordinating Committee for International Staff Unions and Associations) and the speakers were (in the following order):
Pedro Guazo, Representative of the Secretary-General for Investments (RSG), UNJSPF
Toru Shindo, Chief Investment Officer, UNJSPF
Michelle Rockcliffe, Former CCISUA Adviser on Pension
Ian Richards, Alternate Participant Representative to the Pension Board
Tomasz Wojciechowski, Head of Fixed Income, UNJSPF
Also present: Ms. Anastasia Rotheroe, Director for Public Equities,UNJSPF
Discussion points
1.State of the fund’s health
2.Policy regarding the use of external managers and financial derivatives
3.How much of the fund’s assets are being currently outsourced/managed by external managers? What additional percentage of the fund’s assets will be outsourced?
4.What is the reason for the decision to outsource more assets?
5.Who made the decision? Is the UN Secretary-General aware of it?
6.What is the cost efficiency of internal vs external management?
7.Is the decision to outsource more assets temporary or permanent?
8.Was the pension board consulted on the decision?
9.Transparency in the fund’s investments
10.Terminology
11.Environment, social and governance issues (ESG)
Overview
Issues of concern
Ms. Chaoui opened the meeting by stating the importance of the fund’s investments for its 210,000 beneficiaries, who, she said, were concerned about how the fund’s assets are being managed; the environmental, social and governance (ESG) impact of investments; the use of financial derivatives; and the recent decision of the OIM to outsource an additional 18 per cent of the fund’s asset, “which would bring external management to more than 36 per cent.”
Some discrepancies
While the fund’s representatives, led by the RSG, labored to reassure participants, obvious discrepancies among the various statements serve to raise more questions than answers. Some of the issues of contention focused on whether the decision to double the percentage of the fund’s assets that will be managed externally (18 to 36 percent) is indeed a temporary measure until the fund builds its own resources or indicative of a longer-term trend toward outsourcing; what was the actual additional percentage being outsourced; how the decision was made; whether it was already approved or still in the process; whether or not the UN Secretary-General, the fund’s fiduciary, was aware; that the pension board has a consultative, not decision-making function on investments; whether there was a misinterpretation of the pension board’s agreement about when external managers could be used; the meaning of terminology, i.e, “outsourcing” vs “the use of external managers”; and the need for more transparency in investments overall and in ESG in particular.
Bottom-up decision?
Although the RSG insisted that the decision had been made from the bottom up, i.e, by the Fixed Income team, a CCISUA adviser said that knowing the fund staff involved, she had her doubts. There was even less clarity on the topic following the statement of the head of the Fixed Term portfolio.
Mr. Guazo’s response to a question as to whether the Secretary-General was aware of the decision to increase the use of external managers seemed to indicate that he was not.
Note: I've just been informed since posting this summary that the Secretary-General indicated at a staff townhall on or around 17 February that he is aware of the decison.
Word play
The RSG glided over whether or not “outsourcing” and “external management” had the same meaning and the fact that the issue had been taken to the pension board only recently, and at the request of the staff unions. He insisted that the external managers were not on Wall Street. He was also reminded that the board has no decision-making role on investments.
Transparency
Mr. Richards noted that fund’s summary of the board meeting available on its website made it appear that the discussion in the board was “an easy one” while in fact, many questions and concerns were raised.
In response to statements about the need for more transparency on investments, as well as ESG, the RSG stated that providing more information could sacrifice returns and would perhaps be minimally useful to most stakeholders; but he would consider the use of benchmarks for this purpose.
Mr. Richards called for an open debate on the fund’s intentions on outsourcing, as well as on ESG matters.
Past attempts to outsource the Fund’s assets
Ms. Rockcliffe recalled past attempts to outsource the fund’s assets, noting that “In 2007 it was the New York staff union which stopped the attempt to outsource 25% of our fund by the RSG. In 2014, the New York and Geneva unions stepped up when the CEO tried to externalize the pension Secretariat.” She thanked CCISUA for taking the initiative this time, and ended her statement with the "hope that the Secretary-General as fiduciary of the fund would be prudent in assessing performance in terms of investment policy constraints of the past 5-15 years” given that the reason being stated for additional outsourcing was that the Fixed Income portfolio had underperformed. She urged the Secretary-General to “listen to the voices of beneficiaries of the fund and prevent the unnecessary and expensive outsourcing of our investments to external managers on Wall Street.”
Closing
In closing, Ms. Chaoui noted that the meeting was recorded. She would send unanswered questions to the RSG and circulate the answers in a communication to all staff. In her view, some of the answers to questions asked at the meeting were clear, others were not. She believed that the more than 340 persons who had attended the meeting now had a better idea of the issues. CCISUA would follow up with its constituency about the next steps. She ended by reminding the RSG that he, not the pension board, represented and reported to the Secretary-General on the fund’s investments.
Note: unanswered questions are included at the end of some sections.
1. State of the fund’s health
Mr. Guazo stressed that the fund was in a “solid situation”, “as healthy as it had ever been” with $86 billion in market assets as of last Friday, “which is almost 36 per cent higher than the actuarial value of the liabilities.” While at the end of 2021 and in the first weeks of 2022 “there were some factors that could just by themselves individually completely destabilize the economic system” (recovery from Covid-19; inflation; and conflict experienced in recent weeks), he stressed his “appreciation and admiration” for the investment team, and for all staff of the fund, who he said, were “not afraid to speak up” and had weathered past economic crises and were fully capable of doing so again as needed. In making the decision to outsource more of the fund’s assets to improve the performance of the Fixed Income portfolio, there was “full transparency, full visibility” no “ulterior purpose” and “nothing to hide”.
2.Policy regarding the use of external managers and financial derivatives
Mr. Guazo said that in 2019 the pension board and the OIM had agreed on the investment policy which clearly states that the OIM can use external managers “for the purpose that the team is doing it”. The board also endorsed that the OIM “can use derivatives for the purposes that [the head of Fixed Income] made the business cases that were presented last year.” “So when people say that we have kept the board in the dark when we talk about external managers or derivatives, that is not true”, he said, adding (in a statement for which the audio and transcript are unclear): “We’re not going to invest in derivatives ...the teams will use those tools to decrease risk and to increase efficiency in the transactions that they perform.”
Mr. Guazo stressed: “there will be no outsourcing of our fund; some portfolios will only temporarily be managed by external managers.” Similarly, Mr. Shindo noted that “There are no plans to outsource in place of internal resources, nor downsize OIM. It is the opposite. We have just increased the team from 125 to 152 staff just in the last year.”
Question: “What happens if Wall Street loses our assets?”
Mr. Guazo stated: “….something that has been buzzing around is that Wall Street cannot take our resources, right. And the potential asset external managers that can do this, they're not even in Wall Street. And they can even if they were in Wall Street, they cannot take our resources, as Toru, clearly established external managers follows always our instructions. The resources are always in our accounts. And under our control.”
Ms. Chaoui responded: “…you have been trying to be reassuring, by saying Wall Street cannot take our resources. However, it seems that we are giving them the possibility to manage part of our resources. In any case, I think we will not reach an agreement on what is what mainly because of the use of the terminology.”
3. How much of the fund’s assets are currently outsourced/managed by external managers? What additional percentage of the fund’s assets will be outsourced?
Chaoui: there’s a concern about the recent decision by the OIM to outsource an additional 18 per cent of the fund’s assets that would bring external management to more than 36 per cent. The information was shared by the fund with three staff federations in a recent meeting.
Richards: According to what was being presented, what we're seeing is that 50% of the fixed income portfolio will be outsourced without replacing internal resources....in addition to the staff who are being recruited to OIM at the moment, it will start at 50%. And it could go either down to 25% over a period of three years if I'm correct, or it could go up to 75% of outsourcing over a period of three years."
4.What is the reason for the decision to outsource more assets?
Guazo: although the fund is consistently achieving the 3.5 per cent real rate of return, up until last year it was not meeting its benchmark mainly because it was lagging behind on the Fixed Income portfolio. The goal in deciding to outsource more of the fund’s assets is to increase the performance of this portfolio and the sustainability of the Fund.
Shindo: The reason is to “stop the bleeding of the Fixed Income portfolio until internal resources can be built. The portfolio had underperformed in the last 15 years.”
5.Who made the decision? Is the UN Secretary-General aware of it?
Guazo: It was a bottom up decision, proposed by the Fixed Income team. The head of the team was a key player in putting together the proposal, which was endorsed by the internal investment committee and by the OIM as a whole.
Shindo: “...the plan has not yet been decided. It was discussed and endorsed by the [internal] investment committee only last week, and we are presenting the plan to the [external] investment committee on 10 March. It has not yet been officially approved.”
Wojciechowski: “I don't think it's the role of the portfolio managers to set the strategic decisions for the fund, we are here to implement the decisions that management deems to be appropriate, and that that's what we're here for. And we had long discussions. And at the end, you know, the whole OIM supported the plan to outsource the way Toru presented. And that's where we stand.”
In response to a question about whether or not the Secretary-General had approved the decision to outsource more of the fund’s assets, Mr. Guazo stated that he had the delegation from the Secretary-General to make investment decisions. He “set the policy in consultation with the board and with the investments committee, and it is the teams that make operational and tactical investment decisions …it is a segregation of duty scale. This is a decision that the CIO [Chief Investment Officer] together with his team can make and it doesn’t have to go all the way up because this is not a policy decision.”
6.What is the cost efficiency of internal vs external management?
Rockcliffe: A study referred to in Annex V of last year’s pension board report noted that the fund’s internal investment costs were lower than those of peers in every asset class. Most of the savings ($200 million in 2019) were offset because of OIM’s “implementation style” defined as including whether to use active or passive management. Why spend $3 million in fees for passive management of $17 billion when it could be done internally at no extra cost, she asked.
She said that the Fixed Income team had operated in a toxic environment mainly caused by diversion from normal reporting lines and that “the new structure showed a regression, and not an improvement”.
She suggested a number of portfolios that she said were underperforming that could be eliminated or reduced, such as emerging market debt and mortgage-backed securities, to which Mr. Shindo responded that those portfolios were managed by one-person teams and more time would be devoted to overseeing them.
Guazo: The fund does not have resources, training, or ability to manage the portfolio internally. The $3 million will allow the closing of a performance gap in the Fixed Income portfolio which would receive a return of almost 40 times the investment.
Question: how much do we currently spend on external managers? Unanswered.
7.Is the decision to outsource more assets temporary or permanent?
Guazo: Some portfolios would only temporarily be managed by external managers and would return to the fund when they could outperform.
Shindo: “This decision is a stop gap for operational safety.”
Rockcliffe: Experience cannot be developed unless staff are actually doing the work. How else could capacity be built? From her perspective, she said, the glide path presented showed that there was no plan to return all the funds to internal management.
Richards wondered whether the decision was indeed temporary or part of a trend of the OIM toward handing over the management of some of the funds to external companies for whatever reasons there may be.
8.Was the pension board consulted?
Guazo: the fund management briefed the pension board last week and got its full support. The board also endorsed that the OIM management can use derivatives for the cases that the Fixed Income portfolio team presented last year. “So when people say that we have kept the board in the dark when we talk about external managers or derivatives, that is not true”, he said.
After further questions:
Guazo: The tool [use of external managers] has been endorsed by the pension board since 2019. The pension board was informed of the current decision on 24 February 2022. There were some questions and the fund provided answers and the board gave final approval to this proposal.
Richards noted in fact CCISUA had asked the RSG to raise the issue with the board, which he did last week. It wasn’t proposed to the board, he stressed; it was requested to be brought to the board to discuss this very important issue. A lot of questions were raised in the board meeting, he added. The fund’s summary of the board meeting available on its website made it appear that the issue was "an easy one", while in fact, many questions and concerns were raised.
Richards: The board in the past has said the fund could use external advisers, but he believed that many board members understood that the use would be for specialized areas where the fund lacks expertise such as new areas of investment, rather than fixed income, that relates to bonds, treasury bills, etc. He added: “So I think there are perhaps different interpretations of what the board has authorized in the past. But obviously, there are a lot of questions.”
Guazo: it was a very constructive session of the board and he had made the board’s feedback accessible to be read “on the chart”.
Richards: Decisions on investments are not taken by the board. They are taken by the RSG under the authority of the SG. Different board members may have opinions on this, but the fact is that the board is a consultative, not a decision-making body.
Richards noted that there was a question from a board member saying that they were not consulted.
9.Transparency in the fund’s investments
Chaoui thanked Mr. Guazo for accepting the invitation and for his “attachment to transparency: in managing the fund’s investments.
Guazo: in the last two years the OIM has made “huge changes” in order to improve transparency and accountability and to “allow our investment officers to make decisions.”
Rockcliffe: She was on the pension board’s Budget Working Group for 2021 and 2022 where there was no mention of the outsourcing plan, which was a surprise to her coming only a few months after the working group’s deliberations.
Guazo: All the information Ms. Rockcliffe had quoted was public, which showed the “spirit of transparency” in the fund.
Richards: There was a need for transparency about the fund’s intentions regarding internal or external management of assets and there should be an open debate.
Richards: Fund members were not necessarily getting full transparency on investments. There had been reluctance on the part of the RSG’s predecessors to tackle the issue. There was currently more messaging on this, but he believed staff would appreciate more transparency on exactly where investments were made. “There are many public pension funds which are completely transparent about their investments, but the pension fund does withhold a lot of information. There could be a lot more on the website.”
Question: where can we see the exact assets that the Fund invests?
Guazo: There’s a longstanding discussion on the benefits of disclosing the list of all investments of pension funds because that could put the fund in a fragile market competition situation. The few funds that disclosed the list of investments were public funds that had been mandated to do so by their legislators after committing wrongdoing. The fund had to balance between providing a lot of information on investments that would probably not be useful for any of our stakeholders, he said. The fund could explore the issue, including benchmarks which provide “the whole universe of what we invest in. “
10.Terminology
Chaoui: We can dispute the use of words, such as the difference between “outsourcing” and “external manager”. There was no difference in her view. She believed different words were being used to say the same thing.
Guazo: Terminology was contextual…but there was exact terminology used by investment experts. He added: “So I suggest that we believe what the experts say, and also what the pension board says. It’s the maximum governing body for these things. So believe what the experts say.”
11.Economic, social and governance issues (ESG)
Richards: ESG was the area about which staff were most concerned. Participant representatives had been pushing the ESG agenda on the board. Some board members did not initially support the issue but were coming round.
There was a need to understand the meaning of sustainable investing, he said. A recent UN report stated that sustainable funds cover from $3 to 30 million of market assets. There was cynicism about whether banks were relabeling funds as sustainable in order to increase investments. There are questions about the ease of transition to investing in green energy, but there’s also an even bigger cost in staying in fossil fuels over the longer therm. We should have an open discussion about that.
Guazo: On ESG, the fund had “taken measures that go far beyond what anybody else in the financial markets or even in the private sector or other public pension funds have made.” in terms of PRI, there are indeed different definitions and methodologies. That is why we adhere to the definitions, policies and principles of the UN Principles of Responsible Investment (PRI) and to the UN Net Zero Asset Owner Alliance when it comes to the environment.”
Question: if the fund goes in the direction of outsourcing, how are you going to ensure ESG and human rights considerations?
Guazo: “ESG and environment overlay applies to all our investments, whether managed internally or externally.”
Shindo: “We divested exposure in fossil fuels for public equity. We’re implementing this strategy for private markets, which takes a bit more time, but we are applying all the same restrictions on investments managed internally and externally."
Guazo: The fund has reduced 40 percent of the carbon emissions in its portfolio. That’s where the largest chunk of decrease was achieved. The additional 60 per cent to be decreased to get to net zero will be more challenging because that 60 per cent is distributed in all the entities that the fund invests in. It will depend on whether those companies and governments transition to net zero in the next years. This is a massive global effort.
Loraine Rickard-Martin
UN Pension Blog
2 March 2022
https://www.youtube.com/watch?v=xqCAqtoSfbo
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