Asset owners face obstacles setting leadership transition

Asset owners across the globe are facing a new set of challenges as they navigate succession planning at the highest levels of their organizations.

For the U.S., a major concern is the fast-approaching retirement dates for senior leadership at public pension funds. In the U.K., the nature of maturing pension funds — which are moving ever-closer to buyout status — is such that senior roles may become difficult to fill with ambitious, younger employees. And for Australian superannuation funds, mergers pose their own challenges.

Many U.S. organizations "seem to be running into a retirement cliff internally, where the baby boomers are aging out," said Fredrick "Rick" Funston, managing partner and CEO at Bloomfield Hills, Mich.-based Funston Advisory Services LLC, which provides governance and risk solutions for public pension funds. Those organizations "have a much broader issue of succession planning throughout the entire organization, where those most experienced and knowledgeable" are about to retire.

They need to make sure there is a "whole training program, improved documentation and procedures" and other contingency plans in place to ensure the successful transfer of knowledge to the next generation, he said.

That's something that the $301.6 billion California State Teachers' Retirement System, West Sacramento, has examined.

As part of its four-year leadership development and succession plan, CalSTRS calculated the retirement risk within its workforce, using a combination of age and years of state service. As of June 30, 2017, 29% of senior leaders were at immediate risk of retiring — defined as being those aged 55 or older with 20 years or more of state service; and 48% were at five-year risk.

The latter is defined as those aged 50 or over with 15 years or more of state service. That 48% risk was identified as one of CalSTRS' "workforce areas of concern that we will monitor throughout the duration of this plan," a document outlining the plan said. The fund's workforce plan unit — part of human resources — is responsible for creating, implementing and updating its workforce and succession plans.

CalSTRS' board, along with guidance from Amy McDuffee, founder and CEO at Denver-based Mosaic Governance Advisors LLC, oversees the CEO and CIO succession planning efforts, Barbara Zumwalt, information officer at CalSTRS, said in an email.

One of the recommendations in the plan is related to "knowledge transfer and transition," which it said "will become increasingly important as seasoned staff exit the organization and new, less experienced staff or those with less institutional background are tasked with taking over."

Asked specifically about CIO Christopher J. Ailman, Ms. Zumwalt said succession planning has been a priority for him, "both in terms of his own succession and the sustainability of the investment branch workforce." Mr. Ailman joined CalSTRS in 2000.

Other pension funds are also focusing on developing in-house talent to make sure there's a pool of employees upon whom to pin their succession-planning hopes.

One way of doing that is to offer the opportunity to work in different parts of the plan, giving individuals the chance to move through various rotations within the organization, and gaining experience across investment and other parts of the fund. Mr. Funston is seeing public retirement systems doing that, offering "job rotation to ensure (individuals have a) better understanding for an executive position" in the future.

Paul Battye, Manchester, England-based CEO at executive search and HR consulting firm Hoffmann Reed, said he has seen U.S. public funds "shuffle key individuals around into different roles every two to three years to broaden their experience and prepare them for the C-suite."

A public pension fund might also give ambitious individuals the chance to manage larger portfolios of assets and be more hands-on earlier in their careers than those with equivalent experience in the corporate world.

"The attraction is that ultimately in an asset owner, you get more exposure to a wider variety of investment activity at an earlier stage in your career than you typically would at an asset manager," Mr. Battye said. And compared to a role at a consulting firm, "at an asset owner you get to execute on the best ideas rather than simply consulting on them," he added.

There is also "greater upward mobility" for minorities and for women, Mr. Funston said.

Mr. Battye agreed that diversity, equity and inclusion has had "a massive impact on succession planning, and this has accelerated over the past five years."

The firm is working with one asset owner on a "global talent mapping exercise to identify female talent across several key asset classes. We are building strong relationships with this talent, introducing them to the client's key executives, producing exclusive content and opportunities for engagement. All this builds awareness of our client and brings individuals into their succession plan that they might not ordinarily have been able to attract," Mr. Battye said.

One of the challenges for asset owners, however, is competing with the private sector in order to keep staff at a fund for long enough that they are able to slot into a succession plan.

While the private sector can offer serious incentives — generally higher pay than a public fund — "some people are really motivated by public service," Mr. Funston said.

There's also "prestige" associated with "working at the asset owner coalface," said Leo Meggitt, London-based founding partner and head of strategy within corporate finance advisory and executive search firm Forster Chase Group. "One of the main attractions of going to an asset owner is that it is essentially more impactful — you get to see the tangible effects of what you are doing and for the good of the pension fund members. You are responsible for that fund and its direction rather than part of a large, commercial fee-based (organization). There is a strong feel-good about that for many and in most cases, good profile to the role."

Another issue for the trustee boards of U.K. corporate pension funds in particular is that many plans are approaching the buyout stage of their life cycle — and recent improvements in funded statuses due to falling liabilities has made that date even closer.

The aggregate funded status of U.K. pension funds covered by the Pension Protection Fund's 7800 index was 118.2% as of July 31.

"Increasingly, DB funds are implementing derisking strategies with a view to buyout in the not-too-distant future," Forster Chase's Mr. Meggitt said. "That brings a different twist to succession planning."

For example, a CIO departing a pension fund within two years of a buyout will not necessarily be replaced. "That's why a lot of pension funds are considering how big a team they want if they're moving towards buyout," he said.

It can also make attracting candidates to such roles a challenge. "Some of the larger DB pension schemes that are on a flight plan to buyout can struggle to secure talent given the roles they are being asked to perform might not exist for long," Hoffmann Reed's Mr. Battye said.

Mr. Meggitt added that, with candidates conscious of this issue, "the first thing people ask me is 'what's the buyout strategy? Is there one? Is it 10 years?' If the CIO has one in place, there's an end point" to the role.

Added to that is the fact that a candidate for succession to a CIO role is probably midcareer or slightly beyond. "Are they going to join a pension fund and risk being out of a job in the next three to five years? Who knows what the economy will be like. So, pension funds are thinking hard about that and how much they source in-house," Mr. Meggitt said, stressing that it's not a negative point, but an additional thing to think about.

Mr. Meggitt has also seen a rise in the number of people, such as ex-CIOs, setting up to help pension funds on a consulting basis. "That will become, I suspect, more commonplace — rather than having a succession plan for a CIO, (pension funds will) break it up in different ways," maybe employing a consultant one or two days per week while they upskill a person in-house to take over at a later date.

Australia's A$3.4 trillion ($2.38 trillion) superannuation funds market also has its own, unique challenge, as retirement plans continue to merge.

"The market is being dynamically changed by the ongoing consolidation and, as such, many of the super funds are reviewing their succession plan regularly and that of potential merger partners to ensure they have the best team in place post-merger," Mr. Battye said.

In general, pension funds in the U.S. and U.K. have a succession plan in place — be that an emergency plan that kicks in if someone falls ill or departs abruptly, or a longer-term plan of deputies who are training on the job.

However, civil service requirements in some U.S. states, including California, mean a specific successor will not formally be identified — something the CalSTRS spokeswoman highlighted.

Mr. Funston said while some pension funds will be bound by these requirements, "I think it's safe to assume that for most organizations … they have a five- to six-year window and should plan accordingly for that in terms of development" of staff as successors to senior roles.

Hoffmann Reed's Mr. Battye agreed that pension funds are typically open with candidates, both internally and externally, about what role they are being considered for. "With internal candidates, they will often give them personal development plans and put them on leadership development programs to help them gain the skills and knowledge they need to be able to make the next step up," he said.

A number of pension funds across the globe are currently or have recently grappled with succession planning at the highest levels.

This month, Pensions & Investments reported that Mike Ramsey, CEO of TPT Retirement Solutions, Leeds, England, had left the multiemployer plan. David Lane, chief finance officer, was named interim CEO.

"We have succession plans in place across the business, covering a wide number of roles," said a statement provided by a TPT spokesman. The organization has relationships with a number of recruitment firms for executive search purposes, the statement added.

And trustees of the Florida State Board of Administration, composed of the governor, attorney general and the chief financial officer, appointed Lamar Taylor as interim executive director and CIO on Sept. 21. He replaced Ashbel C. "Ash" Williams Jr., whose retirement from the Tallahassee-based board was announced in August 2021. "Mr. Taylor will remain in this position until otherwise determined by the trustees," Emilie Oglesby, external affairs manager, said in an email.

"We focus on succession planning by providing managers with guidance on the processes to follow to assist colleagues with their professional growth and development to ensure the future human capital needs of the SBA are always met. Every position at the SBA plays a role in the success of this organization and retaining current employees or planning for potential vacancies remains a top priority," she said.

The SBA's deputy CIO, Alison Romano, also left the board to join the $35.2 billion San Francisco City & County Employees' Retirement System as CEO and CIO. She started June 13.