The Watson Wyatt report identified six forces for change which were currently at work and would likely continue for the next five years. It then identified six longer-term forces for change. The shorter-term trends were: pressure for talent; improvements in governance; product proliferation; extra-financial factors; more defined contribution models; and organisational change, such as scale and globalisation. The longer-term trends were: better multi-period investment design; better defined contribution value proposition; a new food chain, including the rise of the CIO; new investment content; continued crisis contagion; and new players and new organisational order.

The one consistent theme throughout the report is increasing complexity. For funds, nowhere is this more evident than with investments. A more sophisticated approach to cash balances and other liquidity reserves is just one example.

Another consistent theme, thankfully, is that absolute return solutions are here to stay. Australian super funds have advanced further than many of their overseas counterparts down this path.

The report says: “In our world investors do not want a global equity portfolio that is designed to outperform the world index by 1 per cent per annum subject to specified risk parameters. They need to accumulate wealth that can be converted into an appropriate form, for example, cash sum or annual pension, usually at a specified time in the future. Investors are currently undertaking a process of discovery to identify the most efficient way to achieve this. It is our contention that relative return investing will not constitute the most efficient way.”

The report says that a particularly thorny challenge for funds as complexity and product proliferation grow and their governance struggles to keep pace is ensuring that investment manager mandate design is appropriate to the new investment content required. Absolute return mandates require careful use of benchmarks. An interesting example of this was illustrated at the Global Dialogue conference (see Cover Story, page 16) by Graeme Bevans of the Canadian Pension Plan. The fund assesses its private equity managers by building custom benchmarks which change with each investment decision. The performance of an unlisted investment is compared with that of the relevant market sector index.

To better reflect the desires of their members, especially the growing number approaching retirement, mandates will also start to be defined by the solution they offer rather than investment style – say, CPI plus 4 per cent rather than asset class and, Watson Wyatt says, specific time horizons to delineate between investment styles that favour short-term or longer-term approaches.