Time to see if investment managers are pulling their weight

WITH the downturn in investment markets, organisations should be reviewing their investment managers’ strengths and weaknesses, according to Mercer Human Resource Consulting.

The consultancy's European partner in Dublin, Ken Mortimer said they should also review the weaknesses and the projected adequacy of benefits to ensure that their plans continue to be on track.

"In this environment companies should also consider the benefit expectations of employees," he added.

A Mercer survey has found Fewer than 1 in 3 of the respondents (29%) make investment advice available to their employees. Some 27% are considering its provision, while 44% indicate they do not plan to offer it at all. Organisations that rate their plans as highly successful are more than twice as likely to have an educational approach to member communication than those rating them as only somewhat successful.

Mr Mortimer commented: "Moving from defined benefit to defined contribution plans, employers need to ensure that employees clearly understand the implications and are well informed to enable them to make suitable choices."

Policies and Objectives Mercer's research also revealed that the majority of plan sponsors do not use objective measures to determine the success of their plans, but use anecdotal evidence instead. In Ireland and the UK, only 18% and 26% of respondents, respectively, formally measure whether their plans are successful compared to 53% in the US and 56% in Australia. This reflects the fact that US and Australian DC markets are more developed than Ireland and the UK because they have been established for much longer.

Only half the respondents surveyed (49%) have a written policy setting out the goals and objectives of their DC plan. Australian companies are most likely to maintain written policies (73%) compared to those in Ireland and the UK which are least likely to (24% in each case). The proportion in the US is 41%.

The survey also shows it is companies with successful plans that are more likely to have a disciplined approach to managing and monitoring their plan.

For example, organisations that rate their defined contribution plan as highly successful are almost three times more likely to have documented goals and objectives than those only rating them as somewhat successful.

Overwhelmingly, the most important success factor for DC plans is the employees awareness /appreciation of the value of these plans as cited by 8 out of 10 participants worldwide. "Many organisations have so far struggled to successfully identify and implement a programme to achieve this," said Mr Mortimer. "As well as controlling risk, organisations can improve performance and increase employee appreciation through a more disciplined approach to managing their plan. This should identify the plan's objectives and include a process for evaluation and continuous improvement."

Current Concerns Under-performing assets are the main concern for DC plan sponsors in all the countries surveyed. Mr Mortimer commented: "With the current volatility in global markets, it's not surprising that low investment returns are the top concern for plan sponsors, regardless of geography. "

The survey reveals wide variations in the development of defined contribution plans from country to country.

These range from newly-emerging plans in Germany and the Netherlands, which offer limited investment choice and governance practices, to more refined schemes in Australia and the US, which provide stronger governance and monitoring, and high levels of member education and choice.

Plans in Ireland and Britain fall between the two extremes.

The survey of 1,655 organisations across 10 countries showed that 28% of plan sponsors in the US review the adequacy of benefits less often than every three years, or not at all. In Canada, Ireland and Britain, the number rises to nearly a half to 48%, 49% and 50% respectively.

A similar disparity of practice was noted in the frequency of investment reviews. Reassuringly, over 90% of respondents said they review investment performance annually. However, reviews of the qualitative factors, which are likely to drive future performance, were much more varied. Only 30% of UK participants said they conduct annual qualitative reviews of their investment managers. This compares with 48% in Ireland and 75% in the US.