According to a press release from the consulting firm, to take advantage of alternative investment opportunities, pension plans need to devote considerable resources to managing and monitoring their investments, which generally means a higher budget.
“To delve into these investments before putting the needed governance in place is putting the cart before the horse,” said Carl Hess, director of Watson Wyatt’s investment consulting in North America, in the press release.
The consultant said other firms that have been successful in implementing a high level of corporate governance tend to build teams with complementary skills and clear lines of accountability, making for more effective oversight.
“Several years ago, pension plan sponsors had fairly simple decisions to make – decide the equity-bond split and then select asset managers to implement that asset allocation,” said Hess. “But regulatory issues, product proliferation and competition have complicated these decisions. Sponsors have to deliberate and develop strategies that either take risk to create value or focus on minimizing risk.”
In the news release, Watson Wyatt divided organizations into three categories in terms of the level of governance they will require:
- Companies with the least amount of money to spend on governance should focus on managing down all costs to limit fees and other leakage from easily available investment returns.
- Organizations with sufficient governance resources to pursue some value-creation opportunities should focus primarily on diversifying investments, maybe by adding some alternative investments and finding competitively priced, packaged market exposures with specific risks removed.
- Companies willing to put in place the highest levels of governance should be looking for significant investment diversity, including the non-traditional areas of private equity, hedge funds, infrastructure or real estate, and be willing to accept a high proportion of risk based on the managers of those funds.
Further information on investment strategies can be found at http://www.watsonwyatt.com/buildingblocks .