A growing regulatory burden means trustees are delegating not only more work, but also different types of work. Investment in particular is an area where delegation is increasing fast. What are the pros and cons, and how can trustees avoid the pitfalls?

Action points

  • Consider whether delegation to an investment expert would add value and free up time.

  • Consider the delegation in incremental steps to gain comfort and experience.

  • Will fiduciary management improve the monitoring within the IRM?

The quality of third-party services is one of the key determinants of the level of a scheme’s governance. As such, they play an important role in the good management of a scheme.

However, how much of a role they play ultimately depends on the availability of in-house resources and the trustee board’s skills.

Full delegation therefore tends to occur more frequently in smaller schemes, whereas in larger schemes, it is used within specific workstreams.

Complex investments require different skills

Investment is an area that normally gets a lot of attention as it poses material risks for pension schemes, and trustees are now further challenged by new regulatory changes to improve governance and member security.

Trustees have to fully understand what they are delegating and how much control they wish to pass over

This is leading to a shift in the type of work being considered for delegation. Pooled funds, which are the simplest form of investment delegation to date, have served schemes well historically because the wide choice of pooled funds ensures there are usually several suitable funds that could satisfy any particular scheme’s needs.

As investment solutions become more complex and demand a flexible management approach, they require different types of skills on trustee boards and within in-house teams.

As a result, pension schemes are now looking at delegating the implementation of the full investment strategy, and could achieve this with fiduciary management. 

There are many benefits of delegating the management of a scheme’s investments:

  • the responsibility rests with the investment experts, whose day job involves managing money;

  • it creates headroom for trustees to focus on the wider significant risks in line with the integrated risk management framework;

  • it allows schemes to take advantage of investment opportunities quickly;

  • there are potential cost savings.

Giving up control can be hard for trustees

Delegating to a fiduciary manager involves an extra hurdle, which is to hand over control of the assets to a third party. This idea is often difficult for trustees to overcome.

However, there are things that can be done to give trustees the reassurance they need:

  • trustees have to fully understand what they are delegating and how much control they wish to pass over;

  • start with delegating a small portion of the portfolio to experience delegation and get a deeper understanding of how it works;

  • find a good adviser who can help assess the fiduciary mandate’s performance – this involves monitoring the manager and how well the objectives are managed.

Along the journey to fiduciary management, trustees may wish to consider allocating a portion of the assets to this type of mandate. For example, they could consider delegating fixed income assets.

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In this case, trustees could agree the strategic asset allocation to the various fixed income asset classes and then delegate the implementation to a suitable fiduciary manager.

The fiduciary manager then decides where to invest the money and selects the best managers to do so. This frees up trustee time to focus on the wider and bigger risks.

There are many names given to the delegation of this type of mandate, the most common being fiduciary management and delegated consulting. The key difference is the amount of delegation under each mandate.

This sounds complicated, but one needs to be clear about what the trustees wish to delegate and how much control they are prepared to hand over.

Dinesh Visavadia is a director at Independent Trustee Services

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