More OCIO deals including liftouts of in-house teams

Sponsors of ever-larger corporate retirement plans are considering outsourced CIO arrangements this year, laying the groundwork for a flurry of deals where OCIOs take on both multibillion-dollar pension portfolios as well as the in-house investment teams that previously oversaw them.

Industry veterans say the trend could continue to pick up steam.

"There's probably only been 10 of these (deals) that have been done globally, but we're seeing more interest through RFPs and other situations like that," said Gregory Calnon, a New York-based partner and global head of multiasset solutions with Goldman Sachs Asset Management.

• Four huge deals of this kind have been announced since the summer of 2021, with a combined $55 billion or so in assets shifting to OCIOs — along with intimate and expert knowledge of those pension funds: Royal Mail Pension Plan, London, transferred £8.8 billion ($10.8 billion) in assets and a three-person in-house investment team including CIO Ian McKnight to BlackRock Inc. in February.
• Centrica, Windsor, England, in April 2022 appointed Schroders Solutions as OCIO for £10 billion in assets across three plans, in a deal that also saw the energy provider's seven-person investment team led by CIO Chetan Ghosh join the manager.
• Also in April 2022, Canadian business jet manufacturer Bombardier Inc., Montreal, hired Goldman Sachs Asset Management to run $5.4 billion in pension and insurance assets, as well as $3.6 billion in pension fund assets for clients no longer related to Bombardier. Former members of the Bombardier Global Pension Asset Management team joined GSAM under the arrangement.

• British Airways, Harmondsworth, England, appointed BlackRock in June 2021 as OCIO for £21.5 billion in assets across two plans. The assets had been run in-house by British Airways Pension Investment Management Ltd., and the arrangement included the transfer of CIO David Stewart, Deputy CIO John St. Hill and other investment staff to BlackRock.

The OCIO market continues to grow, as does the scale of corporate plans potentially in play.

Early on, smaller plans — for the U.S. market, mostly $250 million and below — were driving OCIO industry growth but more recently larger plan sponsors have looked at that option and "we've seen bigger transactions take place," noted Davis Walmsley, a New York-based principal with Broadridge Financial Solutions Inc.'s asset management advisory business.

Data compiled by Pensions & Investments show that OCIO assets managed for institutional investors across the globe — under full or partial delegation arrangements — totaled about $2.66 trillion as of March 31, 2022, up 5.4% vs. figures in 2021 and up 86.1% vs. 2017.

Money management consultant Chestnut Advisory Group LLC expects global OCIO assets under advisement to exceed $4 trillion by 2026.

Money management executives highlighted market volatility and the complexity associated with navigating investment opportunities — as well as risks — for pushing more pension fund executives to offload the management of their assets to an OCIO provider.

But global sources also expect to see OCIO-plus-staff arrangements gathering steam in the near future, with different reasons for this shift.

There is a trend of large corporations that had built small in-house teams to manage their retirement assets now "trying to get back to basics, if you will, and (wanting) to focus on their core competencies and strengths," said Timothy Braude, New York-based global head of OCIO at Goldman Sachs Asset Management. Those firms are "looking for strategic partners to work with to take over the management of these assets" — which is how GSAM acquired its Montreal-based OCIO team.

As part of the mandate to run $9 billion in Bombardier and related pension and insurance assets, "we brought those people over and so that's sort of the core of our team there, and that's something that we think is going to continue to be a trend, both in the United States and globally," Mr. Braude said.

The April 2022 deal saw Richard Neault, formerly vice president, pension asset management and chairman of investment committees at Bombardier, become a managing director in GSAM's multiasset solutions business.

GSAM's OCIO business has a little under $210 billion in client assets, with a further $50 billion in OCIO assets under its supervision due to the firm's acquisition of NN Investment Partners, which was completed last year.

For money managers, taking on the in-house teams under an OCIO arrangement can help to smooth the process of acquiring the assets.

"From our experience, the in-house teams are valued members of the organization and providing a good home for these individuals is essential for optimizing the outcomes for our clients," said Neil Walton, London-based head of OCIO and specialist solutions at Schroders PLC. "They carry the intellectual capital and corporate history of the pension plan," he added, and bringing them into the fold helps with business continuity and minimizing any disruption associated with onboarding the assets.

Schroders Solutions had £210.2 billion in assets under management as of Dec. 31, encompassing OCIO, liability, duration and cashflow-driven investing and derivatives-based growth strategies.

Sion Cole, head of U.K. fiduciary at BlackRock, agreed.

"In-house teams have a unique insight into the schemes they have served, a way of working that has proved successful and a trusted partnership with the trustee," he said. BlackRock had $184.5 billion in OCIO assets under management as of March 31, 2022, according to P&I data.

The cultural fit of the team with existing members of the manager is "critical," Mr. Walton said. "Before we take part in any OCIO tender, we try to understand as much as possible about the teams and whether there is a culture fit. If there is, we make a plan to integrate each individual into our solutions business unit."

Schroders has turned down OCIO opportunities where the cultural fit didn't look right, "or where there was significant overlap in roles which would restrict our ability to deliver on the promise of future career prospects," Mr. Walton added.

Once an OCIO contract is agreed to and the assets and team are transferred, the acquired team works closely with other OCIO specialists at the manager, forming a new team for that client. And "once the execs have integrated within our firm, we get them involved in projects that best-suit their skill sets so they can contribute to our business and start enhancing their career development," Mr. Walton said.

The continuity consideration is key for the corporate sponsor offloading the assets and team, too.

"A driver for team-related OCIO business growth is concern around in-house team turnover and key-person risk," Schroders' Mr. Walton said.

However, there may be another reason that team liftouts are becoming more popular alongside asset transfers under OCIO arrangements: "It's just one necessary step in order to materialize the outsourcing — it's just going over a hurdle. Teams are often a roadblock," said Richard Bruyere, Paris-based managing partner and co-founder at money management strategy consultant Indefi Group.

Taking on an in-house pension fund investment team is frequently a condition for the deal to happen.

Schroders' Mr. Walton said that often — almost always — the RFP structure and outsourcing terms will require a contractual transfer of the existing investment team.

Mr. Bruyere said there are, of course, benefits to transferring teams alongside assets for all involved. He agreed that bringing knowledge of a client organization and who the influencers are throughout the corporate sponsor is beneficial.

And while a big asset manager typically will not "need to onboard additional resources to help (them) manage a $15 billion mandate … for any asset manager, there is always room to take on talented people," Mr. Bruyere said.

For the members of the in-house team, there are several attractions, too. "CIOs have specialist skills that are being underutilized as DB schemes mature," Mr. Walton said, referencing the move to liability-matching assets and lower-risk portfolios, from growth assets.

"Global OCIO firms that have a variety of client types (allow) this CIO skill set to be deployed for other clients, some of whom are not on this portfolio derisking path. The team members that join an OCIO firm benefit from immediate access to extra resources, including research, investment specialists, sustainable investing experts and technology support. Overall, the major benefits are a more stimulating working environment and potential career progression," he said.

At BlackRock, executives "typically envisage the in-house team focusing on the specific pension scheme they worked for at the outset of their BlackRock career," Mr. Cole said. However, that career develops for the individual at BlackRock, with the firm believing "that their knowledge makes them exceptionally well-placed to also help other pension schemes in similar positions, and gives BlackRock unique access to institutional investment knowledge specific to these 'mega' U.K. schemes," he said.

One former employee of a pension fund who now works for an OCIO manager following a team liftout deal, who spoke on condition of anonymity, said they are very happy with the arrangement, citing the opportunity to work on other clients, the ability to leverage the platform within a larger money management firm and the reduction of key-person risk that moving along with the assets offers.