How a secondary market is starting to change fid man
The fiduciary management market in the UK has developed strongly over recent years. Estimates point to an annual growth rate of around 30 per cent over the past five years, with the UK market now having reached more than £70bn in assets.
Primary drivers behind the attraction of fiduciary management to UK pension schemes have included governance constraints and increased complexity, as well as risk management needs and the market environment.
As complexity across UK pension schemes continues to rise, many pension fund trustees and investment committees are increasingly constrained in terms of their time and resources to manage their investment arrangements.
As such, the idea of delegating to achieve more is attractive to an increasing number of pension schemes.
Despite strong asset returns, funding levels of pension schemes have dropped due to falling bond yields, and many trustee boards are looking for a more strategic and dynamic approach to managing their assets relative to their liabilities.
Core components of a fiduciary management service involve more frequent funding-level monitoring and delegated execution of derisking plans supporting increased speed and efficiency – and in turn enhanced management of a scheme's funding level.
It is critical that performance targets are agreed between clients and providers at the outset, including benchmarks and reporting format
Furthermore, given the prevailing environment, the need to access new sources of return and requirements for greater diversification to more efficiently manage risk remain key strategic objectives for many UK pension schemes.
The cost of diversification for smaller and mid-size UK pension schemes, however, is high.
A fiduciary management service model can provide a more cost-effective approach for pension schemes of this size through leveraging the buying power and scale of the provider.
Secondary market
The corresponding growth of the industry has in turn led to the early-stage development of a secondary market.
As delegation becomes mainstream across the UK pensions industry, many providers of traditional investment services will look to develop new services to support clients, providers and other participants across the fiduciary management industry.
This trend has passed the starting line but is still in its early stages of development in the UK. While establishing core fiduciary management capabilities requires significant investment, the cost of entry for support services is low.
As such, the market has seen a significant number of companies – traditional consultants, accounting firms and experienced professional trustees – developing tender manager services to support the search and selection of fiduciary management providers.
Many UK trustee groups have the experience and expertise to run tender exercises and oversee providers themselves, but a large number will benefit from having additional options in this area.
These are welcome developments to support current and future client needs as the fiduciary market continues to grow.
The pace of growth of this secondary market will ultimately be driven by the value of the services and the client desire to appoint third parties to support their oversight, monitoring of performance and analysis on fees.
As fiduciary mandates mature, many schemes will likely look for independent oversight. These pension funds are likely to want ongoing support and undertake more formal reviews on a periodic basis, likely at three to five-year intervals.
An important need for clients is to ensure the fiduciary management service provider is adding value and meeting the client's key objectives.
It is critical that performance targets are agreed between clients and providers at the outset, including benchmarks and reporting format.
This approach will support greater transparency and efficiency for clients, along with greater clarity for providers.
As the fiduciary management industry matures, clients will want to ensure they are getting good value in terms of price.
Client demand for delegation through adopting fiduciary management services remains high and the extension of a secondary market will further support clients who see fiduciary management as an appropriate governance and service model to apply to their pension fund arrangements.
Michael Dempsey is a senior partner and European head of fiduciary management at Mercer