Pressured to improve investment returns, reduce costs and shore up oversight and governance, public pension funds are re-evaluating their investment operating models with a view toward taking on more in-house accountability for asset and risk management. This requires funds to carefully evaluate how to achieve a balance of in-house and external talent, tools and technologies.

The trend is a gradual one, which for now means more institutional asset owners are mulling changes than are making changes. And the changes being made are incremental.

“There is a greater focus on investment operations,” said Martin Sullivan, head of asset owner sector solutions for North America at State Street. “That could be as simple as, ‘I’m no longer going to rely on my third-party consultant to evaluate private equity and hedge funds. I’m going to hire an analyst and do that on my own.'”

Pension investment officers are also ratcheting up alternative investments, namely private equity, infrastructure, and real assets. “When you look at what CIOs intend to do over the next three years, they’re taking on more risk in portfolio construction. The overall appetite is definitely a ‘risk-on’ kind of play.”

According to a survey of more than 100 pension executives conducted by State Street and the Economist Intelligence Unit, chief investment officers are being challenged to develop a holistic view of risk across a multi-asset portfolio while aggregating risk data from multiple managers, aligning interests and managing costs.

“The intent was to find out what’s on the minds of CIOs across the globe,” Sullivan told Markets Media. “We got a good balance of perspective from large plans as well as mid-sized plans.”

A major theme for CIOs is “around overall relationships with the money managers, building better partnerships with the money managers that they’re utilizing, and greater transparency into what’s driving returns,” said Sullivan.

A majority of pension fund respondents (81 percent) indicate they are exploring bringing more asset management responsibilities in-house over the next three years. This is due in part to cost concerns, with 29 percent indicating it is a challenge for them to justify the fees of their asset managers.

The survey results underscore the trend toward “strong consideration and evaluation of ‘insourcing’ the investment management of their plan,” said Sullivan. “If 80% are responding in this way, what does that mean for service providers like State Street? What does that mean to the investment management consulting community? That’s an area that we’ve been talking to more and more of our clients and prospects about, and it’s changing the overall discussion.”

As part of this shift, a majority of pension funds (53 percent) are expecting to use more lower-cost strategies to achieve desired investment outcomes, as well as expanding the number of technology platforms and software solutions they employ (43 percent).

When public pensions pull in more of their own investment responsibilities, “it changes the kinds of applications that they need,” Sullivan said. “They may need portfolio management software, they may need better portfolio risk measurement tools, and they may need stronger analytical tools. That was an interesting finding, and something that I think we’ll see more of.”

More than half (51 percent) of funds place a high priority on strengthening their governance over the next three years.

“Clearly what’s on the minds of many of these CIOs is how can they improve the overall governance of their plan,” Sullivan said. “As the complexity of the portfolio construction expands along with the greater risk that they’re taking by investing in more real and private equity assets, it’s creating a demand for people that understand how these kinds of investment products work, and an understanding of systems and technology in how to manage the data that’s out there.”

That’s driving conversations about the data types that need to be reported to boards. “Some board members want all the details, the drivers of underlying returns. Other members just want a synopsis, and are more interested in pie charts and graphs that reinforce the story that the CIO is trying to tell,” Sullivan said. “So the data needs of the CIOs are changing because the kinds of questions that the board is asking are changing as well.”