Corporate and public pension plans are taking two different paths, which is bifurcating the investment consulting industry, sources said.
Corporate plan sponsors want to leave the pension management business, which has increased demand for outsourced chief investment officer services. Most public defined benefit plans are turning to their investment consultants to find high returns in a low-return environment.
"From a consultant's standpoint, many firms are deciding whether to focus on the total-return marketplace only or just the corporate DB marketplace," said Russell K. Ivinjack, a senior partner at Aon Hewitt Investment Consulting Inc., Chicago.
Mr. Ivinjack added that OCIO has taken hold of the corporate DB marketplace, and it's "been surprising to see the size of some of the plans that have decided to outsource. We're seeing multibillion-dollar plans wanting to outsource."
Several consultants speaking to Pensions & Investments agreed the divergence in strategy and focus between corporate and public DB plans is a big development for the industry.
As managing corporate pensionplans becomes more complicated and more resource-intensive, many corporate officers are trying to figure out how to get out of the business. This is leading more corporate sponsors to seek OCIO services, which in turn, is leading more consulting firms to provide OCIO services.
In fact, the demand for OCIO is growing so fast that even some large actuarial firms and investment banks are amending their business models to provide such discretionary services, said Brad Smith, a partner in NEPC's corporate practice in Boston in a phone interview. "There's this huge gravitational pull towards OCIO."
Concerns about market returns and rising interest rates have led corporate treasurers and corporate chief financial officers to embrace a different philosophy, said James Callahan, a San Francisco-based executive vice president at Callan LLC and head of its fund sponsor consulting group. "Most are not thrilled to be in the pensions business."
Steve Carlson, head of investment, Americas, at Willis Towers Watson PLC in Chicago, said his firm, which specializes in advising corporate plans, is "seeing the continued acceleration of plan sponsors looking to how they can better oversee their programs. And often, that's leading them more to OCIO."
Mr. Carlson added the pace at which corporate plan sponsors have turned to OCIO has been faster than anticipated. "Corporate plans looked around and said: 'This isn't my core competency, so why am I doing this? Why not outsource it to a firm doing this 24/7, 365 days a year?'"
Willis Towers Watson's OCIO business had $88 billion in total worldwide outsourced AUM as of June 30.
Meanwhile, on the public DB side, sponsors are focusing more on researching alternative investments to get good risk-adjusted returns. Several consultants have had to expand research coverage to include private debt, private equity and multiasset strategies.
That's not to say that the public sector isn't also interested in OCIO. Many public plans also are looking to hand over the responsibilities of managing their investment portfolios to a consultant. "Increasingly the market is looking for consultants to take over the day-to-day management of the investment program," said Callan's Mr. Callahan. "OCIO is probably the most popular moniker for it. Asset owners just want to get rid of that responsibility and many believe consultants can do a better job of it."
Callan had $24.15 billion in total OCIO AUM as of June 30.
Whether it's through OCIO or creating customized models, consultants are seeing a desire among asset owners for increased engagement from consultants.
"Most plan sponsors recognize that somebody has to be thinking about their portfolio every single day, so there's an increased trend toward outsourcing," said Brian McDonnell, head of the global pension practice at Cambridge Associates, Boston. "It does not have to be complete delegation of discretionary investment authority. Some want outsourcing with some veto power."