Companies that manage investments for their pension plans in-house face a thankless job. The costs are high, the profits are low, and the rewards are limited.
So Nokia USA shed its in-house pension investment staff, hiring Mercer Investments to oversee its U.S. defined benefit portfolio.
“Managing corporate pensions is not a super-profitable business,” executive recruiter Charles Skorina told Institutional Investor. Unlike an endowment or foundation portfolio, most corporate pensions are “just bonds with a little bit of stocks” managed by “number crunchers.”
“You don’t make much money off of that,” Skorina added.
Mercer took control of Nokia’s $13.8 billion pension plan and Lucent Technologies’ $4.2 billion plan in October, while also serving as fiduciary for Nokia’s $9 billion 401(k) plan. Mercer has been aggressively building up its OCIO business, having recently acquired Vanguard’s U.S.-based OCIO shop, giving it a huge boost in scale.
The OCIO giant is assuming the reins as CIO Jeanmarie Grisi prepares to retire in March. Nokia’s investment team members were offered comparable positions at Mercer to continue managing the company’s retirement assets.
For Skorina, “it was logical” that the telecommunications firm was getting rid of its pension, since, to him, it had lost its way. “They lost their mojo, their momentum. What are they now? They blew it in cell phones. They’re not making a lot of money,” he said, adding that the pension is one less thing the company needs to worry about.
Nokia hiring Mercer is part of a growing trend that follows Goldman Sachs lifting out UPS’s $43.4 billion defined benefit portfolio, NEPC assuming control of Eastman Kodak’s $7 billion DB plan, and Shell hiring BlackRock to take over its pension assets. Companies are only all-too happy to take a conservative, liability-driven portfolio that’s generating little-to-no profit off their books.
“This kind of outsourcing is becoming more commonplace because of the costs associated with having an in-house staff,” said Brad Alford, founder of OCIO search firm Alpha Capital Management.
For external investment firms, managing corporate pensions isn’t always profitable, even when the assets are substantial. Corporates’ liability-driven, heavily regulated nature typically requires a more conservative approach focused primarily on fixed income with a secondary focus on stocks and other assets, rather than higher fee alternatives.
“A lot of these plans are fully funded, and they’re focused on fixed income, so there’s not a lot of opportunity to add value,” Alford added.
As a result, managing a corporate pension isn’t career-enhancing, noted Skorina. In fact, he doesn’t even bother conducting searches for corporate plans.
“There’s no upside,” he said. “If you run a corporate pension, you’re siloed; it’s not a core function of any organization.”
Skorina added that the land of corporate pensions is “a different world” from foundations and endowments. “It takes scale and resources to compete” with other allocators for access to things like top managers.
While pensions may be an added expense for corporations, recruiters say they are profitable for OCIOs — albeit low margin. Alford noted that OCIOs are “one of the most profitable and scalable businesses” he’s seen, which is why private equity firms are “buying OCIOs as fast as they can.”
For corporations, outsourcing pensions is a way to offload overhead, while OCIOs gain more assets to manage without needing more staff. “The OCIO has managers they like in every asset class,” Alford added, allowing them to simply allocate new clients’ assets to those managers.
Corporate pension management centers on liability matching, balancing retiree payouts with mortality projections, and focusing portfolios heavily on bonds. Firms like Mercer, Aon, and BlackRock align mortality projections with payout needs in a standardized approach.
“It’s actuarial tables and accountants,” Skorina explained, “not much expensive money management required.” And only a small team is needed to monitor bonds and interest rates, keeping strategies consistent across portfolios.
