Most trustees are perfectly capable of operating beyond the conflicts of interest inherent in fiduciary management, but some small schemes lack resources and support, according to experts.
In September 2017, the Competition and Markets Authority launched its investigation into the supply and acquisition of investment consultancy and fiduciary management.
The CMA has declared both sectors sufficiently competitive. It cautioned over the potential for vertical integration between the three main fiduciary managers to skew the market.
For now, the body may be satisfied, but there remains the potential for the market to become an oligopoly of Willis Towers Watson, Mercer and Aon.
Professionals in the pensions industry are capable of putting themselves aside from their own selfish interest
Hugh Nolan, Spence & Partners
Experts have expressed concerns over engagement levels from smaller schemes. Some are currently struggling to engage with the market properly due to a lack of resources.
Smaller schemes need more resources
Last month, the watchdog published its working paper on trustee engagement with the two sectors.
It considered the extent to which trustees are able to assess value across alternative providers. The paper measured trustees on their ability to switch between providers, issue tenders, and undertake internal and external reviews of fees and quality.
The CMA identified varying levels of engagement across schemes, with small schemes and defined contribution schemes less likely to engage than others.
Caroline Escott, policy lead for investment and defined benefits at the Pensions and Lifetime Savings Association, said that she was familiar with a number of smaller schemes whose trustees lack requisite levels of knowledge and understanding. Part of this may be down to resourcing.
“We see that there are smaller schemes who are very able to think appropriately about the decisions they’re making, including on the investment side,” she said.
However, some small schemes lack the resources to access “the right kind of governance arrangements” and “the right kind of day-to-day support structure”, she added.
We need to trust scheme trustees
The CMA observed that, apart from the process of external reviews, levels of trustee engagement are lower in fiduciary management than in investment consultancy on its three remaining indicators.
It admitted that fiduciary management is “a relatively new and emerging service”, thus making its findings “difficult to draw conclusions from.”
CMA: Fiduciary management not overly concentrated
Neither the investment consultancy or fiduciary management industries show signs of excessive concentration, the Competition and Markets Authority has found, but the vertical integration of the ‘big three’ firms could distort the market in future.
Observers have raised questions over investment consultants who select their own fiduciary management services for clients. Hugh Nolan, director at consultancy Spence & Partners, called for critics of fiduciary management to place their confidence in trustees.
“A trustee who’s got an investment consultant embedded, who knows the way the scheme works… who makes a recommendation for a fiduciary manager that happens to be his own firm will still have that trust going forward,” he said.
“Whilst there’s this clear conflict of interest there, I do believe that professionals in the pensions industry are capable of putting themselves aside from their own selfish interest,” he added.
