Less than 3 per cent of pension schemes retendered for investment consulting services last year, compared to 18.6 per cent of schemes in 2008, according to research from selection specialists IC Select.
Seventy-three per cent of schemes currently contract investment consultants, according to a report by research agency IFF Research, published earlier this year.
The IC Select figures come as the Competition and Markets Authority’s investigation into the investment consultancy and fiduciary management rages on. In its latest update, the CMA found that low levels of trustee engagement with consultants are a direct cause of higher fees.
It feels like there’s an upward trend in tenders
Dan Mikulskis, Redington
The rate of schemes inviting consultants to pitch for new business has dived over the past decade. In 2008, 18.6 per cent of schemes retendered for investment consultancy.
In 2017, just 1.5 per cent of schemes changed investment consultant, compared to 11 per cent of schemes nearly 10 years ago. The IC Select figures did not include scheme mergers and entries into the Pension Protection Fund.
The selection and oversight specialist surveyed 1,000 schemes with combined assets of £697bn. Of these schemes, just 2.7 per cent issued tenders for investment consultancy in 2017.
Donny Hay, director at IC Select, expressed surprise at the rate of decline in schemes formally assessing their investment consultancy arrangements.
“A lot of [defined benefit] pension plans are on journey plans to derisk over time and to get to full funding,” he said. “In many ways that’s maybe made trustees feel they should stick with their consultant for longer.”
Hay cited the CMA investigation into investment consultants and fiduciary managers. “Perhaps trustees are waiting to see the outcome of that before they make decisions about their investment governance arrangements," he said.
With a recognised ‘big four’, the audit industry is another that has faced scrutiny over its level of competition. New EU rules now compel companies to change auditor every 20 years.
Hay dismissed the introduction of compulsory retendering for investment consultants. “If something is going well, it doesn’t seem right to incur a cost to tell you that,” he said.
Retendering rates are not a good measure of engagement
The proportion of schemes retendering for investment consultants has slightly increased over the past two years. In 2016, 2.5 per cent of schemes issued tenders, while in 2015, this figure stood at only 1.6 per cent.
Dan Mikulskis, managing director at consultancy Redington, said the headline figures were inconsistent with his perception of the industry.
Far from being in long-term decline, he said that tendering is on the up, placing the rate between 7 and 12 per cent, based on the number of tenders his consultancy has witnessed and responded to.
“It feels like there’s an upward trend in tenders,” he said. “There is a huge amount of competition out there for those tenders,” he added.
In its working paper on trustee engagement, the CMA listed the switching of investment consultants, and ‘tendering and/or switching’, as two of four ‘headline indicators’ of trustee engagement.
Mikulskis argued against using tendering as a measure of engagement. “We felt that looking at how much trustees challenge their consultant, how engaged they are with their consultant in terms of what exactly they’re asking for… would probably to us be a better measure of engagement,” he said.
Waiting for the CMA investigation outcome
Schemes with investment consultants have remained with their advisers for eight years on average, according to IFF Research, whose figures have informed the CMA’s investigation.
IFF’s own figures suggest that 27 per cent of schemes have switched their main investment consultant over the past five years. A further 14 per cent tendered, but did not switch.
Lack of trustee engagement leads to higher fees, CMA finds
The Competition and Markets Authority has turned its attention to the negotiation abilities of trustee boards, with a working paper that highlights the benefits of engaging third-party oversight of consultants or fiduciary managers.
Rachel Croft, director at Independent Trustee Services, was not surprised by IC Select's findings and agreed that schemes may be waiting for the outcome of the CMA's investigation before issuing tenders for investment consultants, "because you would wait and see what the findings tell you about how you should go about that review".
Trustees would not carry out any fundamental review of advisory arrangements on an annual basis, she added, observing that an assessment would normally happen where a scheme was not sure "how well your investment consultant or fiduciary manager was doing, or [if] you have particular issues".
“It's something you'd really do when you want to take a broader look at the market," she said.
