Fiduciary management - expert knowledge really does help

Topic:

Hot topic

Date published:

Friday, 3 August 2018

Author:

Kevin Clark

A fair proportion of our recent prospective pension trusteeship clients have been talking about fiduciary management. Many seem keen to consider this approach - where investment decisions are delegated to a third party - but haven’t had the confidence in their knowledge to move ahead. This gives some real context to the Competition and Markets Authority (CMA) July 2018 provisional report on its investigation into investment consultancy and fiduciary management services.

What does it mean for pension trustees?

The CMA feels the investment consultancy industry of 37 firms isn’t too concentrated. However, to enhance competition, pension trustees need to have better tools to evaluate their performance and become more engaged in monitoring strategy. I agree with the CMA that common reporting standards would help and is something the market should develop.

The fiduciary management industry has certainly seen rapid growth - increasing tenfold in the past 10 years to c£135bn within a UK market of £1.62 trillion. There are currently 17 fiduciary managers who provide a package of services from recommendation of an investment strategy (based on each pension scheme’s latest actuarial data) to recommending the asset allocation policy and securing the investment managers on their own platform.

Two other remedies suggested by the CMA that translate into direct action for pension trustees are:

• mandatory competitive tendering of new fiduciary mandates and, in the next five years, those secured without such a market review; and
• the need to set strategic objectives.

I welcome these suggestions. They are manageable for pension trustees and reinforce what we regard as best practice anyway. I am sure mandatory tendering is welcomed by investment consultants too - after all, they are always looking to grow their businesses!

Whilst trustees may be mandated to go out to tender, the fiduciary firms will not have to respond to them. Amid a more active market, fiduciary managers may become more selective, in effect reducing competition and requiring trustees to take advice beforehand on how to meet their objectives.

Typically, pension trustees have been using the competitive tender route before making their choice. However, the CMA statistic highlighting 71% of trustees have chosen the fiduciary offering of the incumbent consultant is a little concerning. Are trustees making a truly impartial and informed choice? Amongst the other CMA recommendations, I think enhanced guidance for trustees and more transparent fee disclosures for each component will help with this.

It is a shame the CMA rejected the idea of the mandatory appointment of professional trustees to add expertise (well, I would say that, wouldn’t I?); but you should think seriously about using the knowledge and experience of a professional trustee when considering fiduciary management or any other complex investment options. The CMA did note fiduciary managers have found professional trustees add value in helping get more complex investment decisions over the line. Having us in to give some expert guidance on one issue doesn’t mean you have to appoint us on an ongoing basis!

Use your governance time and budget wisely

In many cases, pension trustees appoint third parties to evaluate fiduciary managers and this independent oversight can add value. In my view, governance time is best spent monitoring the scheme’s performance against its own benchmark and developing its own ever-evolving strategy via the investment consultant. The appointed third party can report on the more granular analysis of each manager’s performance.

Overall, I welcome the greater rigour in the initial appointment and ongoing monitoring the CMA is recommending, provided it can come at a reasonable price.

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