Among different challenges facing those who manage assets for pension funds, the governance and the dynamics of decision making are probably the most decisive for the pension fund long term success. While there is a wide and expanding range of literature and training programs on financial topics such as market and interest rate risk management, portfolio construction, alternative asset classes, performance benchmarking and so on, there are currently very few manuals at disposal of governing boards to guide them in designing successful decision-making process. This book aims to help to fill this gap by providing clear and implementable guidance through some real-life examples that any board member – but also a CIO - would be able recognize and put in practice.
In my roles of Chief Investment Officer for the Pension Fund of CERN and member of Investment Committee or Board member for other pension funds or organizations, I have experienced many situations and dilemmas discussed in this book. I will highlight a couple of them that address some of the most important and sometimes neglected risks for pension funds: over-reliance on models or advisors and mismatch between the governance structure and governance budget.
As discussed in the book, many pension fund boards use models to support their decision making but the fact is that models will never be perfect. At the same time if the board explicitly acknowledges the limitation of the model and endorses that judgement is required, this may – although it may sound counterintuitive - greatly improve its decision process and the quality of the outcomes. Many decisions at the board level do actually call for judgement and this is precisely where a structured decision process is important. In the same context, articulating the roles of advisors and the scope of their inputs to the decision process, as suggested by the authors in the book, is of key importance to ensure the accountability both at the Board and at the CIO level.
Last but not least, the most important and impactful decision that any Board needs to make is to identify those decisions that should fall under its remit as well as those that could be delegated to the CIO and internal team. In some instances the board may want to make as much decisions as possible because board members perceive it as a way to stay in control. Independently of the underlying reasons, such arrangement would typically lead to suboptimal use of governance budget (time, resources and competence), with potential negative long-term impact on the fund performance. The authors make a compelling case for Boards to distinguish between strategic and operational decisions and assign the different types of decisions to those levels in the governance structure where there is adequate governance budget – i.e. time, resources and competence - for them to be managed.
In the current times of uncertainty with elevated geopolitical risks, forceful monetary tightening and unexpected financial vulnerabilities, it is particularly important for the Boards to identify and harvest all possible sources of alpha. My years of experience investing in a wide range of asset classes taught me that the investment alpha is scarce and very often difficult to access. Investment alpha can be very costly and its persistence is sometimes questionable. But there are fortunately other types of alpha that are more accessible and the governance alpha is definitely one of them. I believe that this work of Martijn Vos and Alfred Slager, where they put in practice their extensive hands-on experience and academic excellence, can greatly assist the Board in creating their own governance alpha.
Elena Manola-Bonthond
Chief Investment Officer of CERN Pension Fund