BOSTON -- The downsizing of corporate America spells opportunity for State Street Global Advisors, which is beginning to push into the business of handling entire pension funds on an outsourced basis.
"We think the time has come for this," said Jack Moore, vice president of SSgA's outsourcing unit, the Office of the Fiduciary Advisor. "Previously, we were alert to the opportunity, but now we have an interest in growing this business."
Outsourcing of pension funds has grown slowly over the years, but there are indications the business is beginning to pick up, in part because of continuing pressure on fees from plan sponsors. Providers say it is, in some ways, an extension of a manager-of-managers service.
The leaders in the outsourcing arena now handle $30 billion in assets in these accounts, and project it could soar much higher in the next five years if corporate downsizing continues.
SEI Investments and Frank Russell Trust Co. have some of the largest footprints in this business so far. The term outsourcing, as used here, refers to an arrangement under which a plan sponsor turns over all assets and administrative duties of the pension fund to an external firm. The hired firm will do asset allocation and asset/liability studies; hire and track the performance of managers; fire and replace managers; compile reports and perform administrative duties; and keep the assets in custody.
Most, if not all, managers hired are from the outsourcing firm's manager-of-managers program.
Frank Russell, Tacoma, Wash., claims to have been first with the service, having agreed in 1980 to manage a $30 million independent pension plan for Burlington Industries, Greensboro, N.C. Russell now has 78 such "strategic relationships," reflecting a total of $14 billion in pension assets under management. The average length of the relationships is 6.7 years, according to Russell data.
Frank Russell Trust Co. manages more than $19 billion in total assets, all of which are commingled funds.
SEI Investments entered the business of complete outsourcing five years ago and has 125 clients representing $10 billion, the majority of which is U.S. pension fund assets. SEI manages -- in what it calls a "cofiduciary" program -- 81 corporate accounts, six union funds, 17 endowments and foundations, and nine health care pension and endowment plans, in addition to other health care funds. According to Oaks, Pa.-based SEI, the smallest cofiduciary plan is $10 million; the largest is a corporate plan of $1.5 billion. SEI has $36 billion in total assets under management.
"We see an enormous trend in this business," said Ed Loughlin, president of SEI's asset management group. "This offers a tremendous opportunity to trustees because the world has become more complicated and the process is different from the consulting process. They absolutely need this."
SSgA's Mr. Moore said outsourcing firms can offer fees of 30 basis points or less, compared with 48 basis points for other investment managers. That appeals to plan sponsors who increasingly are seeking lower fees.
SSgA's Office of Fiduciary Advisor now has five clients, all corporations, with a total of $5 billion in assets under management. Its first outsourcing client, Brown & Williamson Tobacco Co. of Louisville, Ky., was in the midst of downsizing in 1994 and opted to hire an outside expert in lieu of pension staff.
"Outsourcing is an ideal solution in a spinoff situation," Mr. Moore said. "The company has an existing plan that had been managed by the parent company, and after the spinoff, there's no one to handle it."
That's what SSgA considers the fruit ripe for picking now, he said.
LIABILITY AN ISSUE
Consultant Callan Associates Inc., San Francisco, has looked into providing outsourcing, but found the increased liability raised the cost, said Ron Peyton, president and chief executive.
"Add daily monitoring to that and it can be twice the cost of an in-house staff," he said. "We've bid on the business, but we would conduct it from a different perspective, to maintain our role as an independent investment consultant. We've been careful to stay on the consulting side of the line, which is becoming blurred."
SEI and Russell executives do not see a problem with being both a representative for the plan sponsor and a representative of the investment manager. Managers in the stable that don't perform according to expectation are taken off the account and replacements are hired quickly, without having to wait months for the matter to go before the pension board. It improves the fiduciary position of the plan sponsor, which is charged with getting the best performance possible, outsourcing executives say.
The total outsourcing business has not been heavily tracked; executives don't have figures on how much money is involved in outsourcing industrywide.
Corporate funds traditionally have been the heaviest users of outsourcing, in part because U.S. corporations already outsource numerous parts of their business processes.
Intense competition and downsizing in corporations has meant not only staff cutbacks in the corporate finance office, but also a refocusing of finance chiefs and corporate treasurers on growing company profits.
ACNielsen Corp. of Stamford, Conn., placed its $50 million to $100 million defined benefit plan with Frank Russell after the company was spun off from Dun & Bradstreet Corp. in the fall of 1996.
"There wasn't the staff and we didn't want to bring that expertise on board," said ACNielsen Treasurer John Forster.
"We wanted to save time and money so we set up a steering committee to establish the fundamentals of the plan and hired an outside adviser, Russell. The performance has been very good."
The company receives quarterly reports, some customized reports and other standard reports.
Midsize public pension funds continue to show only a mild interest in outsourcing, which might be due to their traditionally heavy use of outside consultants, said Lou Rowan, national sales director for Frank Russell Trust. A small to midsize pension fund probably wouldn't need consulting services if it outsourced its pension plan because consulting-type services are included in the package, he said.
"A manager of managers is so important for the middle market," Mr. Rowan said, referring to funds with between $15 million and $1 billion. "For them to try and diversify across 10 managers with 50% of their assets doesn't make sense, but they realize they are not receiving full benefit of capital market performance. Plan sponsors are learning to think of the funds as a whole."
But it can be quite a jump from a manager-of-managers situation to a cofiduciary relationship like outsourcing. When a plan sponsor hires a manager of managers, it already has decided on the allocation amount and the asset class. It is hiring a manager. When it hires an outsourcing service, the plan sponsor receives an asset/liability analysis, an asset allocation study, investment policy and planning, and coordination with the actuary.
When the asset allocation is decided, the outsourcing firm hires the managers, using primarily, if not exclusively, managers in its manager of managers program. The outsourcing firm handles manager and performance monitoring, manager replacement, portfolio rebalancing and brokerage oversight.
"We make the assignment to the managers and manage the managers," said SEI's Mr. Loughlin.
Outsourcing firms also handle administrative services, provide custody, act as trustees, do liquidation services, handle record keeping and issue benefit payments.
Says Mr. Loughlin: "We become the trustee, the custodian, the investment manager and the consultant. A single source. And it's really catching on because it's easier for committees and fiduciaries to manage. It gives trustees more protection. As a cofiduciary, we shield them from responsibility and provide accountability with the appropriate asset classes and appropriate money managers. The client makes sure we're the appropriate firm to deal with. We're held accountable as a fiduciary."
Russell's Mr. Rowan said, "The plan sponsor and committee retains control at the policy level. We're doing the implementation for them. We have the resources to accept the risk."