Pension Funds' Problematic Operations Structure (w/ Jim Keohane)

TL;DR

Jim Keohane discusses how pension management in Canada has shifted towards in-house investment operations, resulting in cost savings and better risk management.

Transcript

ED HARRISON: So how have you changed HOOPP and how has the pension industry in Canada in particular changed in the time when you first came in 1999 to now, when you're leaving? JIM KEOHANE: So there's a few big things. We've pretty much insourced all our activities. So we have our own in-house investment management staff that runs virtually all of ... Read More

Key Insights

• 🥺 HOOPP has experienced success by insourcing investment management, leading to cost savings and better risk management.
• 🇨🇷 The cost advantage of in-house management compared to individual investors is substantial, with HOOPP's costs being around 10 times less.
• ✋ The governance structures of US pension plans hinder the adoption of in-house management, often resulting in higher fees paid to external managers.
• ☠️ Top-notch staff and market-rate compensation contribute to HOOPP's success in managing investments.
• 🏂 Politically influenced board structures in certain US pension plans prevent them from adopting more cost-effective in-house management approaches.
• ⏳ The compounding effect of lower investment costs over time can significantly impact the final value of investments.

Questions & Answers

Q: How has HOOPP changed its investment management approach?

HOOPP has shifted towards insourcing all its activities, with their own in-house investment management staff responsible for the majority of their investments. This has resulted in cost savings and better control over risk management.

Q: Why did insourcing investment management lead to cost savings for HOOPP?

Insourcing allows HOOPP to avoid the higher fees associated with external managers. Jim Keohane mentioned that the 15% of externally managed funds actually cost more to run than the remaining 85% managed in-house.

Q: What are the advantages of in-house investment management?

In-house management provides greater control over risk management. HOOPP can adjust their exposure to the market easily and tailor their investment decisions according to their comfort level, unlike when funds are handed to external managers.

Q: How does HOOPP's investment costs compare to individuals?

HOOPP's investment costs are only around 0.2% per year, while individuals typically pay between 2% and 3%. This significant cost difference can result in individuals having half as much money over a 40-year period.

Summary & Key Takeaways

• HOOPP (Healthcare of Ontario Pension Plan) has transitioned to insourcing activities, with their in-house investment management staff overseeing most of the money.

• By insourcing, HOOPP has achieved significant cost savings compared to external management, with better investment returns and increased control over risk management.

• Individual investors typically pay between 2% and 3% in annual investment costs, while HOOPP's costs are only 0.2%. Over time, this cost difference can result in significantly less money for individual investors.