Is it time to consider fiduciary management?

The recent gilt market volatility and its knock-on implications for pension schemes highlighted the benefits of having sound governance arrangements in place.

My colleague, Sophia Harrison, discussed this recently in her blog which asked if it was time for schemes to prepare their governance to battle the current market conditions. As Sophia highlighted, one of the ways pension trustees can potentially improve their governance is with the help of a fiduciary manager.

Under a full fiduciary management (FM) approach, pension trustees typically retain responsibility for setting the scheme’s investment strategy but can choose to delegate some, or all, ongoing investment decision making and implementation work. This minimises the likelihood of missing any de-risking triggers or collateral calls and can save trustees a lot of time and worry, particularly during times of market turbulence.

What are the main advantages of fiduciary management?

As well as the ease of investment governance and ongoing implementation, there are other potential benefits of a full fiduciary management arrangement. For example, for smaller schemes, it can enable access to a much wider range of asset classes and investment managers than may otherwise be the case. This, in turn, enables better asset diversification and can potentially reduce investment risk.

Given FM fees are typically paid directly from the assets, it can also eliminate the need to negotiate with the sponsor on fees for individual investment projects. This can help speed up the decision making and implementation processes.

For larger schemes, in addition to the potential benefits noted above, a fiduciary management arrangement can actually prove more cost effective than having a separate investment consultant and investment managers – effectively a double win.

This doesn’t mean FM is a panacea or suitable for all schemes. For smaller schemes, the ongoing cost of fiduciary management is likely to be higher than a separate consultant and investment manager(s), so the additional cost needs to be weighed against the additional benefits. That said, fiduciary managers are increasingly making simplified, lower cost versions of their solutions available for smaller clients so this may prove less of a hurdle going forward.

There are also costs involved in selecting and appointing a fiduciary manager and transferring assets over to them. If, for example, a scheme is only a couple of years away from buy-out, there may not be enough time for the benefits of appointing a fiduciary manager to outweigh the initial set-up costs.

Equally, some pension trustees may enjoy making investment decisions and selecting their own investment managers. For them, fiduciary management may not be desirable.

In general, I believe it’s worth trustees reviewing the different governance models available and considering whether FM may be beneficial for their scheme. This is particularly true where the recent gilt market crisis raised the trustees’ concerns about their level of capacity and/or investment expertise.

Considerations when selecting a fiduciary manager

A fiduciary manager is essentially carrying out the combined role of an investment consultant and investment manager, as well as the implementation aspects, so trustees need to be sure they’re capable in all these areas.

As we witnessed during the gilt market crisis, some fiduciary managers fared much better than others due to their operational set-up and choice of underlying investment managers. So, selecting the right fiduciary manager is essential.

Key considerations include:

• How successful have they been in helping trustees achieve their funding objectives and (if relevant) how much experience have they had in guiding trustees through to buy-out?
• How broad a range of asset classes and funds do they offer and how successful have these funds been in meeting their investment objectives?
• What are their environmental, social and governance (ESG) credentials and how well are ESG factors integrated into their investment process?
• How well resourced are they to cope in times of market crisis and what contingency plans do they have in place, for example in the event of a cyber-attack or other systems failure?
• How well do they minimise transaction costs and out-of-market risk when onboarding and transitioning assets?
• What are their initial and ongoing costs? Are these costs competitive and do they represent value for money given the level of service being offered?

Given the nature of the relationship with a fiduciary manager, it’s also worth considering soft skills such as how effectively they communicate with the trustees, how well they would work with them and if they’re able to tailor their service to the trustees’ requirements.

To conclude

As well as potentially improving governance, fiduciary management can provide a host of other benefits. Whilst it won’t be the right solution for everyone, it’s certainly worth considering as part of the governance toolkit available to trustees, particularly those looking to ease their investment governance burden and focus on other elements of the scheme.

 

 

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