Pension funds are an area of concern for most organisations. No local authority's pension fund can fully meet all its liabilities and rising life expectancies mean that liabilities will only increase. The size of this problem becomes clear if you take into account that, while pension funds vary in size, even the smaller funds often have assets worth more than £500m. There is a real need to extract high performance from fund assets while making sure that risks are properly managed. To achieve this, investment consultants develop a bespoke strategy designed to increase income and close the liabilities gap. This strategy spreads pension fund investments over a number of different types of asset, such as UK equities or property. The same investment consultants who develop these strategies usually assist organisations in selecting their fund managers. Like many markets, pension fund investment consultancy is dominated by a few major players. Therefore there is a tendency for consultants to provide clients with a pre-prepared shortlist. This can contain little supporting analysis to justify the basis on which it has been compiled. This raises questions around the criteria that has produced the shortlist. The lack of transparency makes it unclear whether the selection is based on current data and whether it is limited to the consultant's preferred list. There is a lot for pension fund trustees to take into account to make sure they act as effective stewards, not least the huge amount of money involved. When you add the significant role of investment consultants to fund manager selection, it is not clear that the overall process meets clients' needs. More transparency in demonstrating the analysis used to select fund managers would address many of these concerns. No organisation would purchase services in any other area without clearly understanding the alternative options, or the benefits and disadvantages of its decisions. Using good commissioning and procurement practice, the client and consultant would work together to define objectives for the investment manager, taking into account the fund's investment strategy. The consultant would then base quantitative analysis on these objectives to shortlist the initial list of respondents. This analysis would focus on areas of specific concern to the client, such as the stability of the fund management team. There would even be an opportunity to fine tune the selection criteria before the production of the final short list. This would place the onus on the consultant to demonstrate that the selection process was rigorous in both its scope and the methods used. For the client, it offers the certainty that an objective selection was made, involving a comprehensive analysis of the investment management market. Pension fund trustees are legally obliged to maximise the return on investment, over other concerns. Taking this into account with the value of assets involved, the need for fund managers to generate returns and close the gap on fund liabilities, clients should demand nothing less as representatives of the trustees and pensioners. Mike Suarez is executive director of finance and resources at Lambeth LBC
