Retirement fund trustees carry a fiduciary responsibility to ensure that member savings are protected not only through sound investment decisions, but also through effective oversight of the people, systems, controls and service providers that support those decisions. Investment performance remains important, but it is only part of the governance picture. The operating environment behind each mandate can have a direct impact on member outcomes.
This is why operational due diligence (ODD) should be treated as a core part of retirement fund governance rather than a technical exercise that sits in the background.
For retirement funds, the question is not whether boards must become operational specialists. It is whether there is enough evidence to show that the organisations they rely on are well governed, resilient and able to discharge their responsibilities to the fund.
ODD focuses on non-investment risks associated with investment managers, investment structures and critical service providers.
It assesses how organisations are governed, operated and controlled, rather than looking only at investment performance. For retirement funds, it provides a structured way to assess whether the organisations responsible for managing and safeguarding member assets have the resilience, controls and oversight needed to support long-term outcomes.
Retirement funds are not only selecting investment managers. They are also relying on administrators, custodians, platforms, management companies and other outsourced providers to perform functions that are critical to the fund. Each relationship creates operational dependencies that should be understood, documented and monitored.
Looking beyond investment performance
Retirement fund governance requires boards to look beyond returns when evaluating managers and service providers.
A manager may have a strong investment track record but weaknesses in its control environment. A service provider may appear well established but depend heavily on a small number of individuals. An investment structure may offer attractive opportunities but present complex valuation, reporting or liquidity challenges.
These factors are not secondary considerations. Weak operational controls can affect transparency, decision-making and, ultimately, member outcomes.
ODD provides a framework for assessing whether governance structures are clear, responsibilities are appropriately segregated, risks are identified and monitored, and critical controls are functioning as intended.
Financial resilience is another important consideration. Trustees should understand whether service providers have the resources, insurance arrangements and business continuity plans needed to meet their obligations. Professional indemnity, fidelity and cyber insurance do not replace sound controls, but they can provide an additional layer of protection when operational failures or unexpected events occur.
From appointment to ongoing monitoring
One of the most common misconceptions about ODD is that it is only relevant when appointing a new manager or service provider.
Due diligence at appointment is only the starting point. It gives boards an initial view of a provider’s operational risk, but that view can become outdated as ownership structures change, senior people leave, businesses grow, systems are upgraded and outsourced arrangements shift. It should therefore form part of an ongoing monitoring framework, with clear triggers for review when material structural, operational or risk-related changes occur.
Trustees and principal officers should remain alert to developments that may change a provider’s risk profile. These may include changes in ownership, leadership turnover, operational incidents, cyber events, regulatory concerns, unresolved audit findings or adverse media reports. When significant changes occur, waiting for the next scheduled review may not be appropriate.
This ongoing view gives boards a stronger basis for decisions about continued appointments, remediation plans and escalation where needed.
Supporting better decision-making
ODD turns technical operational information into practical governance insight.
For principal officers, this can strengthen reporting to boards by providing a broader view of operational resilience, business continuity, cyber readiness, financial sustainability and remediation of identified issues.
It helps boards assess whether the organisations they rely on have the people, systems, processes and control environments needed to support the mandates entrusted to them. It supports more informed engagement with managers and service providers. Rather than relying on reputation or historical performance alone, boards can better understand how risks are managed, how controls are monitored and how identified weaknesses are addressed.
This is particularly valuable where investment structures are more complex and transparency may be limited. However, ODD is not confined to specialist investments. Administrators, custodians and traditional asset managers can also present operational risks that require effective oversight.
Protecting member outcomes
At its core, ODD is about member protection.
Operational failures can affect members in practical ways, including inaccurate reporting, processing delays, control breakdowns, data breaches or weak oversight of outsourced providers. While no governance process can eliminate every risk, a well-executed ODD framework can help retirement funds identify vulnerabilities before they become significant problems.
Assessments should also be proportionate. A smaller organisation should not necessarily be expected to have the same infrastructure as a large global institution. The objective is to determine whether the controls, oversight and operational arrangements are appropriate for the size, nature and complexity of the mandate.
From there, a practical starting point is to include a few operational due diligence questions in appointment, review and monitoring discussions:
- Are responsibilities clearly defined and appropriately segregated?
- Are key controls operating effectively?
- Are outsourced providers subject to adequate oversight?
- Are cyber, business continuity and operational risks being monitored?
- Is there appropriate insurance cover in place?
- Are identified findings being addressed within reasonable timeframes?
These questions help boards move from confidence based mainly on reputation to confidence based on evidence, documented controls and active oversight.
As retirement funds navigate increasing complexity and heightened regulatory expectations, ODD helps turn oversight into a more active, evidence-based governance discipline.
Effective retirement fund governance depends not only on choosing the right investment strategy, but also on ensuring that the structures supporting that strategy are resilient, accountable and fit for purpose. Operational due diligence gives boards a practical way to test that assurance and strengthen the fund’s ability to protect member outcomes.
