Goldman Sachs' latest OCIO wins highlight that even some companies with the most sophisticated and well-resourced pensions are concluding that managing retirement assets in-house is no longer worth the cost and complexity. 

Goldman Sachs Asset Management just added about $70 billion to its outsourced chief investment officer business with two new mandates—from Verizon Communications and Lockheed Martin. In addition to Verizon’s $40 billion in defined contribution assets, the OCIO giant will oversee Verizon’s $10 billion defined benefit assets and Lockheed Martin’s $20 billion. Representatives from Goldman said the firm plans to bring over some employees to support the mandates but declined to disclose how many.

Verizon is outsourcing the pension built by industry veteran Britt Harris, who forged long-term partnerships with fund managers and set the standard for many public pensions. For several years after Harris left Verizon to become CEO of Bridgewater in 2005, the portfolio was a top-quartile performer.

With Lockheed Martin, Goldman is taking on a sophisticated portfolio with alternatives, global equities, and fixed income. Christopher Li, the aerospace and defense company’s CIO from 2007 to 2018, turned the “plain-vanilla plan” into one with extensive in-house management capabilities.

Since beefing up its roughly $500 billion outsourcing business, Goldman has benefited from the industry-wide shift to OCIO, landing such large corporate OCIO mandates as UPS’s $43.3 billion portfolio, Shell’s $40 billion in international pension assets, Eli Lilly’s $25 billion retirement assets, and BAE Systems’ $28.2 billion.

As more plan sponsors want broader investment capabilities—including access to private market assets—the OCIO market is projected to grow to $4.2 trillion by 2028, with Goldman being the clear market leader. With so many pensions either fully or nearly fully funded, many CIOs don’t want to deal with managing a complex portfolio—or the internal staff to manage it.

“Corporate pension funds are being sold to insurance companies through pension risk transfers,” said Brad Alford, founder of OCIO search firm Alpha Capital Management. “There are no new DB plans; everyone’s going to defined contribution.”

 

Not All Sponsors Plan to Outsource

While the trend towards OCIO is growing, not all sponsors are looking to outsource. Companies like IBM, Exelon, and Delta Air Lines, among others, have recently affirmed their commitment to managing their pensions internally.

“There is a very strong case for keeping management of the pension plan in-house, especially for plans more than $5 billion,” said one corporate CIO who oversees $24 billion in assets.

The allocator added that historically, many companies that outsourced have often returned in-house after only three or four years, citing such plans as Delta, U.S. Steel and the American Red Cross that went OCIO before being brought back in.

Delta’s CIO Jonathan Glidden explained over email that the airline outsourced its plans in 2008 when emerging from bankruptcy before re-insourcing the pension in 2011 to better integrate its pension risk with corporate risk after the global financial crisis.

“Insourcing allows a more customized asset allocation focused on alpha production through a high allocation to alternatives along with a better-balanced beta profile and targeted hedging,” Glidden added.