Lessons learned from completing ‘lift outs’- Ensuring you get the most from your OCIO partner

Niall OSullivan , Global Solutions, Chief Investment Officer

Eimear Walsh, Europe Head of Investments

Andy Farrington, Multinational Investments Leader

Many large corporations are on a quest to simplify, reduce risk and drive cost efficiencies across their organizations. The management of corporate pension plans and other asset pools has not been immune to these efforts. 2024 was a pivotal year for change, particularly where corporations employed in-house investment professionals to run these assets.

Last year, our Chief Investment Strategist Rich Nuzum, CFA published a piece exploring the increasing number of lift outs (where in-house assets, and in many cases teams, are ‘lifted out’ to an external provider, often termed the Outsourced Chief Investment Officer, or OCIO), and examining the governance and people considerations around lift out transactions. The question of which provider to choose can be just as challenging as the question of whether ‘to lift out or not to lift out’. We now want to share some of the lessons learned from completing a number of lift outs on behalf of large asset owners around the world.

Ensuring a successful lift out

Ultimately, successful lift outs hinge on the alignment of objectives between sponsor and provider. These considerations span the entire gamut of governance.

Our experience shows that sponsors can potentially give themselves a strong possible chance of a successful lift out by focusing on three key areas. First, they must ensure they have all their current needs covered in the best possible way; second, with a more specific focus on corporate pension plans, they must choose a provider that can evolve with them as their needs change; and third, careful stakeholder management of the local pension plans is needed to ensure the lift out is managed at the plan level, as well as at the sponsor level.

1.????? Do you have access to everything you need?

Cost reduction is often a key objective and success criterion for a lift-out transaction. Ensuring the selected OCIO provider can help achieve this goal, with no constraining limitations on scope or service, should therefore not be overlooked.

Partnering with an OCIO provider can also support access to a wider range of investment expertise and solutions. This is particularly true in more specialist areas such as private markets and sustainable investment. Along with the increased flexibility of open architecture, the economies of scale that the largest OCIO providers bring in terms of aggregate buying power to support cost savings have increased. Additionally, asset owners are increasingly recognizing the asymmetry in downside risk-bearing between continuing to run assets in-house versus a lift out, and choosing to transfer operational risks onto their chosen provider.

One often underestimated risk is that pension plan sponsors are left with a long tail of smaller country pension plans at the end of a lift out transaction. In-house investment professionals have typically covered smaller country plans, as well as the larger pension plans. While work associated with smaller plans may be less frequent, when needed it can be intensive and require knowledge of local market regulations and practice. In many cases, this activity can be enhanced if an OCIO provider has local boots on the ground in all countries in which a sponsor has plans. In these situations, an understanding of the plan sponsors’ accounting and corporate finance needs and the information they formerly received from their in-house teams is critical to ultimate satisfaction.

2.????? ?Have you selected with an eye to the best of the past, present and future?

Continuing the pensions focus, sponsors are adapting the implementation model to ensure arrangements are sufficiently ‘future proofed’ for change as the corporate objectives for the plans evolve over time. For example, as many defined benefit pension plan funding levels have improved in recent years, the focus of those sponsors has generally shifted from accumulation and growth to risk minimization, and even possibly to risk transfer.

In this environment, the increasing need to manage assets for risk minimization differs significantly from the objectives historically pursued by in-house teams, who may have focused more on return-seeking portfolios. Understanding each in-house team, its skills and where it can fit in the future is important. As strong fiduciaries to the plans, they likely possess important legacy knowledge. Their interests and skill sets can allow the right OCIO provider to present them with better long-term career growth opportunities via supporting the breadth of a diverse client base’s investment management needs, while remaining directly engaged with the corporate sponsor’s assets where relevant, and as a priority. In other words, return-oriented investment professionals may find the career path at an OCIO provider attractive, and be willing to make their legacy knowledge available to a sponsor that no longer needs their return-seeking skills but still needs their legacy knowledge. Accordingly, sponsors can decide to focus on transforming the skills of their in-house teams or consider the potential benefits that a lift out to an external OCIO provider can offer.

This can lead to a ‘win-win-win’ for a sponsor, affected in-house team members, and the OCIO provider. The sponsor can gain the expertise of the OCIO provider on risk mitigation considerations; the in-house corporate investment team can be redeployed to other clients that require their skills, with the OCIO provider directing their returns-seeking skill set, as needed, across the wider client base; all while providing continuity and historical knowledge of plans to the original sponsor.

3.????? Can you manage the interests of all key stakeholders?

Finally, for any lift out, it is important to ensure effective stakeholder management from the outset to facilitate smooth implementation. Issues can arise when a corporation has selected its OCIO provider at the global level, without consulting the local pension plans, which may ultimately own the decision at the local level. This can lead to a lift-out transaction that is agreed at the global level, but ultimately fails due to local plans refusing to use a provider they had little say in choosing.

For some sponsors, it may be appropriate to implement the lift out transaction globally, while for others, a more staggered country-by-country approach might be more suitable and provide greater confidence in the approach, as local plans see successful implementation of key early adopter pension plans. Naturally, this varies from company to company, meaning there is no one-size-fits-all approach.

Success isn’t one-size-fits-all

If a lift out is to achieve its intended results, clarity on the success metrics relevant to a specific organization and limiting surprises in key areas of sensitivity (e.g. potential cost savings, team considerations) are crucial.

We want asset owners to know their OCIO provider wakes up thinking about how they can help them both now and in the future, just like their in-house investment team was originally built to operate.

We want to know what you think - please add a comment below.

Swing state: investment themes and opportunities in 2025 and beyond

As we navigate the investment landscape, our 2025 report theme, “Swing State,” reflects on the current environment's potential dynamics and outlines key themes and opportunities for the next five years. We hope you find our key observations helpful for your investment decision-making.

???????????? Regime changes: Long-lasting shifts in economic conditions.

???????????? Super-cycles: Current positions in economic and commodity cycles.

???????????? Megatrends: Long-term transitions reshaping the global landscape.

Read the full report here: https://bit.ly/3Pq1UsQ

Important notices

References to Mercer shall be construed to include Mercer (US) LLC and/or its associated companies.

? 2025 Mercer (US) LLC. All rights reserved. Please read here: Important notices (mercer.com)