There is no doubt that for several schemes, the appointment of a fiduciary manager has been a welcome addition to the support framework available to them.
A 2016 KPMG survey of the sector shows that 719 mandates have been granted since the arrival of fiduciary management in the UK (of which 459 were full fiduciary mandates) with a total of £123bn assets under management.
Eighty-six per cent of these appointments cover assets under management of £250m or less, affirming the attraction for smaller and medium-sized schemes. Aon Hewitt’s recent 2017 survey paints a similar picture.
The appointment and continued monitoring of fiduciary managers will undoubtedly change if the separation of services goes ahead
The drivers behind these appointments are largely unchanged – lack of in-house expertise on the part of the scheme, managers’ ability to speed up implementation of investment decisions, greater access to asset classes not otherwise available on a standalone basis, and freeing up governance time for other parts of the scheme’s operations.
A welcome recent development in these types of mandates is the measurement of performance against changes in liability values rather than simply benchmark hugging. This backs up the argument that fiduciary managers are not replicating the traditional ‘balanced management’ approach.
Third parties still underused
However, there have always been concerns in some quarters about the appointment of fiduciary managers without an independent third party to assist trustees.
KPMG’s report shows that in 2016 only 33 per cent of new appointments were made using an independent third party. Aon’s report notes that the use of beauty parades is becoming more regular, but this is still only at 68 per cent.
Under a traditional consulting model, replacing an underperforming investment manager on the consultant’s recommendation is easy to achieve. However, replacing a combined fiduciary manager and investment consultant is completely different.
The KPMG report advises only 13 per cent of those schemes were undertaking independent monitoring.
With what seems to be a lack of independent oversight of both appointment and ongoing performance, can some trustee groups demonstrate that their fiduciary manager is actually doing what it is supposed to do?
Separation is on the horizon
The traditional consultancies have historically controlled the majority of these mandates. However, the market appears to be changing, with recent fiduciary manager appointments of investment houses like BlackRock and Schroders.
The Financial Conduct Authority’s asset management market study highlighted the increased use of fiduciary manager mandates, particularly among the traditional consultancy firms, and has raised the potential separation of services.
The appointment and continued monitoring of fiduciary managers will undoubtedly change if the separation of services goes ahead. The increased transparency should create the level playing field with traditional asset managers that has been a concern for the latter group.
One thing that remains unclear is what will happen to the research teams after any such separation. If they are currently a shared resource, parent companies will have to decide whether they belong to the fiduciary manager or the traditional investment consultant.
One side could be weakened if this transfers fully to the other, and it is uncertain how the bill would be split for the hire of a new team for one business. Alternatively, if it is somehow shared on separation then both sides might be impacted.
Consolidation threatens current landscape
Finally, there have been continued calls for scheme consolidation – the target for this looks likely to be the circa 2,000 UK defined benefit schemes with 100 members or less.
If those schemes are the primary buyers of fiduciary manager services, consolidation could impact on future and current mandates.
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Whether that consolidation goes ahead is up for debate, but it looks unlikely that a merged scheme could operate with a collection of up to 2,000 different investment strategies. If governance is difficult as a standalone small scheme, it will be impossible for a larger merged group.
If the consolidated group consider themselves large enough to appoint their own internal investment team, it will therefore have a reduced reliance on fiduciary manager mandates.
Chris Parrott is a council member at the Pensions Management Institute and head of pensions at Heathrow Airport Holdings
