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Optimizing Outcomes for Portfolio Transitions

As portfolio allocations change and market volatility increases, institutional investors benefit from working with the right transition management partner to optimize outcomes.

There are multiple factors currently impacting institutional investors and their portfolio allocation decisions. Some of these may drive an organization to make significant changes to their portfolio. For example, a move to Environment, Social and Governance (ESG) investing or a desire to consolidate pension plans in order to reduce costs and gain scale may prompt institutional investors to overhaul their portfolio allocations.

However, in an uncertain environment, time and expertise are crucial components to making significant changes. Working with a transition management partner is key to a successful outcome.

The Rise of ESG Investing

Perhaps one of the most notable investment trends in recent years is the rise of ESG investing. Now emerging regulations are putting asset owners and managers under more pressure to focus on ESG.

In Europe, ESG has been at the forefront of investment trends for years, and the EU is taking steps to broaden its reach. In November 2022, the European Parliament approved The Corporate Sustainability Reporting Directive (CSRD), which requires large firms to disclose data on how their business practices impact people and the environment plus any climate-related risks. 1

Slated to take effect in 2024, the requirements apply to all EU-based companies, plus large corporations with a significant presence in the EU.

In the U.S., the Securities and Exchange Commission (SEC) proposed new climate-related disclosures for investors in 2022. If the regulations are enacted, investors would be required to disclose “climate- related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.” 2

As institutional investors overhaul portfolios to align with ESG regulations, the transition could be a large-scale under taking. In this case, asset owners benefit from the expertise of a transition manager. And since adherence to ESG policies is a priority, investors should seek out an organization with the following:

  • Focus on transparency and integrity
  • Solid track record of risk aversion and ethical behavior
  • Commitment to diversity, equity and inclusion
  • Strong corporate governance, internal audit and counterparty review
  • For clients domiciled in the U.S., seek a provider serving as a co-fiduciary, compliant with ERISA

Plan pooling and consolidation

Across the globe, the trend toward plan consolidation and fund pooling continues to gain traction as public pension plans and healthcare systems seek ways to reduce costs, gain scale and increase efficiencies.

Australia has one of the world’s largest pension pools, due to significant growth in its superannuation funds.3 As a result, smaller funds are faced increased pressure and scrutiny. The Australian Prudential Regulation Authority, the nation’s largest regulator for the financial services industry, said that funds with assets less than A$30 billion are “uncompetitive”.4

In the U.K., occupational DC pension plans decreased by nearly 40% from 45,150 funds in 2011 to 27,700 in 2021.5 On the DB side, more than 80 local government pension funds pooled their assets in 201867 into eight separate pools and are expected to consolidate to three pools by 2030.89

In continental Europe, the Netherlands is a pioneer in pension consolidation with the total number of pension funds decreasing from about 1000 in 2000 to less than 200 in 2022.10 Over the past few years, the nation has been shifting its largely defined benefit pension system into two new types of defined contribution contracts, allowing pension funds to choose which framework to adopt. The vast majority11 (94%) of the country’s pension participants are in defined benefit (DB) schemes, but in 2023, they are starting to make the transition to two new types of defined contribution (DC) contracts.

Pension consolidation has also been picking up momentum in the Middle East. Saudi Arabia merged its General Organization of Social Insurance (GOSI) with the existing Public Pension Agency, creating a massive fund worth over $250 billion at the time of the merger in 2021.12 Aiming to cut costs, help investment returns and increase efficiency, the move made GOSI one of the largest pension plan investors on earth. Just next door, Oman merged eight pension funds into two: designating one for public and private sector employees and one for the military.13

As pioneer of the large public pension funds model, the Ontario Teachers’ Pension Plan is emulated by many consolidated funds. With approximately $242 billion in net assets as of 2023, the plan is one of the world’s largest institutional investors. It’s no surprise that with such a successful local example, 72% of Canadian pension funds surveyed in 2021 were considering consolidation. More than half of the respondents are planning on consolidating within five years.14

Pension consolidation is just starting to gain traction in the U.S. The State of Illinois has merged all its municipal fire and police pension plans, except for the City of Chicago, into the Illinois Firefighters’ Pension Investment Fund and the Illinois Police Officers’ Pension Investment Fund.15

And in the U.S. healthcare sector, increases in merger and acquisition activity led to additional consolidation. From 2016 to 2021, there was a substantial increase in health system consolidation with more than 1000 announced hospital and healthcare system M&A transactions.16

Pension funds and healthcare systems that pool or consolidate assets and change investment strategies as a result will find themselves in need of an organized portfolio transition manager to guide the process. There are many advantages to this approach.

  • Transition managers add project management expertise, ensuring coordination between legacy and target investment managers, custodians and trade desks, saving the pension fund time and energy.
  • Transition managers can act in coordination with the custodian to execute transitions as assets move, to migrate from legacy to target real time.
  • Transition managers can also bridge the gap between the previous investment strategy and the new. Options include utilization of ETFs, optimized index replication or futures to maintain market exposure against a benchmark and ensure the portfolio remains invested in the interim.

Impact of Market Volatility

While certainly not a trend, market volatility is a factor to consider in any portfolio transition. From political unrest to economic uncertainty, market volatility can wreak havoc on investment portfolios.

2022 was tumultuous for investors with the S&P 500 dropping by 19% and the Nasdaq declining by 33% over the course of the year.17 Trying to fight rampant inflation, the U.S. Federal Reserve hiked interest rates seven times in 2022, ending the year with the highest federal funds rate in 15 years.18 Despite the steady increases, the Fed is expected to continue to raise rates in 2023.

In an uncertain environment, particularly when investors need to act quickly due to increased volatility, having a seasoned transition manager at the ready is crucial to be sure that execution is handled in an expert manner and that risk is managed properly.

Navigating Through the Complexity

The portfolio allocation decisions that institutional investors make are always changing, as recent trends show. Some of these decisions may mean major investment strategy shifts. Transition management is a key service to manage the process and the inherent risk of such a big change. An experienced transition specialist can help navigate risk, complexity and market volatility to make the process run more smoothly and effectively.

To learn more about Northern Trust Transition Management, reach out here.

 


1 Sustainable economy: Parliament adopts new reporting rules for multinationals | News | European Parliament (europa.eu)
2 SEC.gov | SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors
3 Australia's top pension fund warns against tapping savings to fix economy | Reuters
4 Australian Pension Fund Chairman Urges Caution on Consolidation - Bloomberg
5 Defined contribution pension market consolidation continues, TPR’s latest figures show | The Pensions Regulator
6 https://mycouncil.surreycc.gov.uk/documents/s73145/14%20-%20Annual%20Report%202019- 20%20-%20Annexe%201.pdf 
7 http://www.lgpsboard.org/index.php/schemedata/scheme-annual-report
8 https://www.lgcplus.com/investment/lgps-pools-expected-to-further-consolidate-18-07-2019/
9 http://www.lgpsboard.org/index.php/schemedata/scheme-annual-report
10 Netherlands: Pension transition drives consolidation | Country Report | IPE
11 https://www.thinkingaheadinstitute.org/content/uploads/2021/02/GPAS  2021.pdf
12 New giant Saudi pension fund ready to rival world's largest investors - Arabian Business
13 Pensions, sovereign wealth funds, and industrial policy in the Gulf: A look at fund consolidation | Middle East Institute (mei.edu)
14 72% of Canadian pension funds considering consolidation options: survey | Benefits Canada.com
15 Illinois consolidates 649 police and firefighter pension funds | Pensions & Investments (pionline.com)
16 2021 M&A in Review: A New Phase in Healthcare Partnerships | Kaufman Hall
17 Stocks Drop in Final Trading Day of Year - WSJ
18 Fed Raises Rate by 0.5 Percentage Point, Signals More Increases Likely - WSJ

 


NORTHERN TRUST CAPITAL MARKETS is comprised of a number of Northern Trust entities that provide trading and execution services on behalf of institutional clients, including foreign exchange, institutional brokerage, securities finance and transition management services. Northern Trust Global Services SE (‘NTGS SE’) provides Institutional Brokerage, Securities Finance, Foreign Exchange and Transition Management services in the EU and EEA. Northern Trust Investor Services Limited (‘NTISL’) provides Transition Management services in the UK, and subject to local regulation, other EMEA jurisdictions on a cross-border basis. Northern Trust Securities LLP (‘NTS LLP’) provides Institutional Brokerage services in the UK and Australia, and subject to local regulation, other EMEA and APAC jurisdictions on a cross-border basis. The Northern Trust Company (‘TNTC’) provides Foreign Exchange, Securities Finance and Transition Management services in the UK, and subject to local regulation, other EMEA jurisdictions on a cross-border basis. Please refer to your Northern Trust terms of business for details of the relevant Northern Trust entity for the services you receive.

© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; Northern Trust Global Services SE UK Branch, 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, 3rd Floor, Haakon VII's Gate 6, 0161 Oslo, Norway; Northern Trust Global Services SE, Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE (itself authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF). The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386),  Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.

IMPORTANT INFORMATION: For Use with Institutional Investors/Financial Professionals Only. Not For Retail Use.

Securities products and services are sold by Registered Representatives of Northern Trust Securities, Inc. (member FINRA, SIPC),a wholly owned subsidiary of Northern Trust Corporation.

The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may affect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice.

Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, adviser risk and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe Northern Trust’s efforts to monitor and manage risk but does not imply low risk.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.

Craig Blackbourn portrait

Craig Blackbourn

Global Head of Portfolio Solutions
Craig Blackbourn is a Senior Vice President and Global Head of Portfolio Solutions. Craig is charged with the long-term strategy of the Portfolio Solutions offering, client management and day-to-day oversight for the business operations.

© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF; Northern Trust Global Services SE UK Branch, UK establishment number BR023423 and UK office at 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden, registered with the Swedish Companies Registration Office (Sw. Bolagsverket) with registration number 516405-3786 and the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) with institution number 11654; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, org. no. 925 952 567 (Foretaksregisteret) [VAT if applicable], address Third Floor, Haakon VIIs gate 6 0161 Oslo, is a Norwegian branch of Northern Trust Global Services SE supervised by Finanstilsynet. Northern Trust Global Services SE Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE. The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) are licensed by the Guernsey Financial Services Commission. Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386),  Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.