The differences between OCIO and fiduciary management

The UK Defined Benefit (DB) pensions market has come to grips with fiduciary management (FM) over the past decade, but 'OCIO' mandates are also growing in popularity.

Pension scheme trustees and corporate sponsors might be wondering: "What is OCIO and is it relevant for my pension scheme?"

What is an OCIO?

Outsourced Chief Investment Officer (OCIO) is a phenomenon which has gained traction in the UK pensions market over the last few years, being a more established concept in the United States. It is an investment governance approach which involves delegating certain aspects of investment, typically relating to implementation and execution. OCIO as a phrase is more obvious when considering institutional investors who have a defined 'Chief Investment Officer' role, which typically only the largest UK DB schemes tend to have.

"OCIO is a broad term, covering a vast degree of options for pension schemes. Schemes need to understand what they are looking for in order to then find the best provider, rather than just basing decisions on terminology alone."

OCIO vs. fiduciary management – what’s the difference? 

In many ways, fiduciary management is a form of OCIO. Both approaches involve pension schemes delegating aspects of decision-making and implementation to a third party.  However, as the industry has evolved, the term fiduciary management has become synonymous with 'full delegation' of investment decisions for typically smaller pension schemes (often less than £1bn in assets).  

Many firms marketing OCIO services define it as a more 'flexible' or 'bespoke' version of FM, offering trustees the ability to input into investment decisions. In years gone by, this structure may have been described as partial FM, discretionary portfolio management, or a whole host of other names. The main difference between these terms and the term 'full FM' is either: 1) the proportion of the portfolio covered; 2) the level of delegation/extent of trustee involvement; or 3) whether independent advice is taken. 

Unlike FM, OCIO has no formal definition in the UK pension scheme context. This is important when it comes to knowing what rules and requirements there are in relation to the selection process. For example, depending on the structure presented and where, this doesn’t include advisory responsibilities, certain OCIO providers may not be captured by the DWP’s requirements to tender, or may not report on different GIPS® performance metrics.

The graphic below graphic sets out the key decisions and where responsibility may lie between trustees and a delegated provider (FM or OCIO provider).

Does this mean fiduciary management is changing?

Fiduciary managers seek to access economies of scale and provide efficient implementation, many of whom use pooled vehicles to do this. For these FMs, one could argue that over time the FM model has actually become less customisable and flexible. In particular, many schemes are more limited by the choice of funds offered by the specific FM, relying on 'model' portfolios, rather than it being a fully tailored option for every scheme.  

However, there are many FMs that offer a more open architecture approach to portfolio construction. One could argue the latter sounds more like OCIO – in that a pension scheme can tailor the relationship as much as they want – this is where the lines become increasingly blurred.  

Is OCIO only for large pension schemes? 

Many of the mandates in the press are for multi-billion pound pension schemes, and involve the transitioning of in-house staff to the OCIO provider. This can provide an attractive solution to some corporates looking to scale down the work done in-house as their pension schemes mature.

However, this doesn’t mean an OCIO structure is only available to these schemes, and indeed not all OCIO providers would be set up to take on headcount as part of the deal.  

OCIO is a broad term, covering a vast degree of options for pension schemes. Schemes need to understand what they are looking for in order to then find the best provider, rather than just basing decisions on terminology alone.  

In summary

The world of delegated investment is evolving and providers are looking to find new ways to serve their clients.  

For any pension schemes considering delegation of any type, it is imperative that the roles and responsibilities of each party are clearly laid out and understood. If agreements are unclear, pension schemes could be exposed to unnecessary risk and higher costs. Trustees and corporate sponsors should ensure there are no gaps in governance, which would ultimately fall back on the pension scheme. 

While we have largely considered OCIO within the UK DB pension scheme context, OCIO providers are also supporting other asset owners such as charities, endowments and family offices. These investors face different challenges compared to pension scheme trustees, but equally important is the understanding of accountability. 

For more information on the pros, cons and practicalities of adopting an OCIO approach, read How to use an Outsourced Chief Investment Officer.