Retiring NEPC consulting veteran sees challenges ahead at home, abroad

Allan C. Martin — an NEPC partner who began working with pension funds back when investments were pretty much confined to domestic stocks, bonds and cash— is retiring this month at what he depicts as a time of considerable challenges for institutional clients and consultants alike.

"When I joined Bankers Trust in 1969, if you looked at defined pension plans, about half of (their) assets were in the form of investment contracts with insurance companies" and a quarter of what remained was managed by Bankers Trust and J.P. Morgan, Martin noted in an interview.

In the interim, public defined benefit plans — Martin's exclusive focus over 23 years with NEPC —have moved on to a diverse mix of public and private assets, overseen by staffs "as expert as I've ever seen them," with ever-superior risk management tools at their disposal and support from custodians that's better than ever, he said.

But all isn't rosy, Martin said, pointing to political uncertainties at home and geopolitical uncertainties globally as factors clouding the outlook now for institutional asset owners.

At home, Martin notes, politics are increasingly intruding into the world of pension fund management.

"I've never seen political pressure on plans that I've seen today," Martin said, noting that the only common ground between calls on the left for immediate divestment of fossil fuels and calls on the right to avoid China and ignore ESG considerations is their ability to constrain pension managers' efforts to craft the best portfolios for plan members.

Amid that charged political atmosphere, Martin said he likes to think of himself as a centrist, but for some, his belief that people have the right to a secure retirement and healthcare, regardless of their employment status, leave him "more to the left."

On the topic of secure retirement, Martin said he's happy to be working with public defined benefit plans — as the most efficient vehicles for meeting the needs of workers in retirement — and lamented statistics showing the number of DB plan members plunging over the past half century to 12 million from 27.2 million while the ranks of defined contribution plan members were jumping to 85.3 million from 12 million over the same period.

Defined contribution 401k plans, designed to be supplemental, "are not now nor have they ever been an adequate retirement vehicle," Martin said, noting that employees covered by the $48.7 billion Arizona State Retirement System would have to put well over 30% of their annual salaries into a 401k plan to match the benefits they earn now after 40 years of service as DB plan members.

He pointed to IBM's decision earlier in January to reopen its defined benefit plan as a hopeful sign that "we'll move back to a world that recognizes that employers have an obligation to help workers retire with dignity and not just giving some money now and promise that maybe it will be OK later."

If not, and with the average worker having only $65,000 or so in 401k savings with five years remaining until retirement, this is poised to be "the next great crisis that nobody wants to talk about," Martin said.

The domestic political conundrum now, meanwhile, is less the result of strongly held views than an unwillingness to work toward a compromise, he said.

Martin recalled a heated but "civilized" debate decades ago at Bankers Trust's annual pension conference about whether to invest in apartheid-era South Africa.

"Today's arguments are no longer civilized," with the fundamental issues in play too often getting lost in a flurry of slogans and name calling, leaving it very, very difficult to manage retirement assets in certain venues, Martin lamented.

Meanwhile, long-standing U.S. policies that have been key to the postwar surge in global growth are in play for the first time in memory, whether it be alliances such as the North Atlantic Treaty Organization, which underlay America's security posture for the past 70 years or the broad U.S. commitment to free trade.

While working through the "first order" effects of, say, a broad-based shift to greater tariff protections for U.S. manufacturers is a considerable effort, thinking through the second, third and fourth order effects will "boggle your mind," Martin said.

A move to "less coordination, less free flow of goods and services, more protectionism" threatens to push the world in the direction of the environment that prevailed in the lead up to World War I, with a lot of nations focused on their own special interests, Martin said.

Martin said that backdrop leaves him especially concerned about the mix now of U.S. stocks vs. non-U.S. and emerging markets stocks because "the politics are so significant there."

The consulting industry, meanwhile, faces its own set of challenges, with factors such as remote work in the wake of the COVID-19 pandemic and the growth of outsourced CIO businesses complicating the task of fostering the next generation of industry leaders to replace the pioneers of the 1970s and 1980s who are retiring now, Martin said.

"There was a big group of people that came in that wave in the '70s, '80s and '90s" that did a great job and are moving on now, he said, calling the situation facing the industry a "brain drain."

Martin said the growing importance of consultants' outsourced CIO businesses remains a development meriting close monitoring to ensure that the more tactical aspects of those OCIO businesses don't infect the "long-term strategic perspective" that's key to advising pension fund clients – even if there's no hard evidence at present of such a pitfall.

Meanwhile, for an "apprenticeship business" such as consulting where experience is key, mentoring people in a post-COVID-19 world where people aren't in the office has become an added challenge, he said.

Martin called his own apprenticeship at NEPC, after 26 years at Bankers Trust and four years at growth equity shop RCM, an especially happy one, built on an agreement he hammered out with NEPC founder Richard Charlton after Charlton reached out to him in 2000 to lure Martin to the firm.

Martin said when he expressed concerns that in an industry lacking operating leverage like consulting, the better he performed, the greater NEPC's incentives would be to stretch him thin by having him cover ever more accounts, Charlton agreed to have him look after a maximum of six public pension fund accounts, of sufficient size to make the economics work, and that Martin could retain those accounts as long as he and the clients were amenable.

Martin said that set up has let him efficiently leverage the experience he's accumulated over years and decades with NEPC clients such as the $13.1 billion San Bernardino County Employees' Retirement System, since 2003; the $14.9 billion New Mexico Education Retirement Board, since 2007 and the $48.7 billion Arizona State Retirement System, since 2009.

"I know the boards, I know the challenges," he said, adding that understanding governance and the pressures people come under is key.

Meanwhile, the current policy backdrop — with the U.S. Federal Reserve's rate hiking cycle cresting and yields this year just as likely to fall as push higher — is as challenging as any in memory, Martin said.

That prospect could justify adding on the margin to his clients' modest allocations to U.S. Treasuries and trimming the substantial private credit exposures of 15% to 20% they've built up over the years, he said.

"I still think private credit is attractive (but) relative to where it's been, maybe not as much," Martin said.

But he remains a fan, saying while "it's not riskless," the risks of private credit are "relatively manageable."

By way of explanation, to outperform with stocks, "you have to have a thesis that's different … you have to be right" and ultimately other people have to recognize that you were right and bid up the price of the stock, Martin said. Or, "I can buy a loan off a bank at a discount" and as long as the credit gets repaid, there's no need to worry about what anybody else thinks, he said.

Martin said while the full-time consulting phase of his career is coming to an end, he has no plans to leave the scene entirely. "I want to stay intellectually engaged in this," even if there's nothing concrete to report at present about his next moves, he said.

As a "Type A" personality, Martin said, the only thing he needs to be careful of is not ending up doing just as much work as he was doing before he retired.