Pension assets under fiduciary management hit £114bn during 2015, but independent trustees remain sceptical of the alignment of interests underpinning such arrangements.
Assets flooded into fiduciary management strategies during 2015 as tough market conditions and a shifting regulatory environment forced trustees into new territories to meet their objectives.
In the year to June, assets under management in fiduciary structures increased by 65 per cent year on year to exceed the £100bn mark, according to consultancy KPMG’s latest survey of the market.
The professionalisation of scheme oversight
Barry Parr, co-chair of the Association of Member Nominated Trustees, said the body approached fiduciary management with “a degree of caution”, but many recognise it is becoming ever harder to achieve an adequate yield.
“That is very important for members,” said Parr. “If the results tend to bear out that fiduciary management can work then I think our members would generally support it.”
Parr said a broad rationalisation of pension schemes and a move away from corporate defined benefit schemes towards defined contribution arrangements had changed the landscape for lay trustees.
But he added that member-nominated trustees sustain a key link with employees.
“[We] still have the expectation of a role for trustees – particularly for communicating with members.”
Last year’s report from the financial services specialist disclosed an uncomfortable truth for investment consultants when it found 75 per cent of fiduciary management contracts were awarded on a non-competitive basis.
The 2015 survey does not provide an updated figure for the proportion of total mandates won via competitive tender, but it does indicate that less than a quarter (23 per cent) of new appointments awarded during the period were advised by an independent third party.
The findings come just weeks after the UK regulator, the Financial Conduct Authority, launched a review of cost control, competition and conflicts of interest across the asset management industry.
The FCA review will include a probe of the activities of consultancies offering fiduciary services, due to concerns they are increasingly pitching their own asset management services to clients in the form of fiduciary offerings.
You need to be very careful as a trustee about what it is that you’re buying
Richard Butcher, PTL
Healthy scepticism
Independent trustees were found to be particularly sceptical of fiduciary services in a survey from consultancy Hymans Robertson.
Just one in 10 professional trustees believe fiduciary managers are best placed to deliver investment advice aligned to the interests of the pension scheme, while nearly two-thirds (59 per cent) think fiduciary frameworks cost more than independent advice.
Richard Butcher, managing director at independent trustee company PTL, who fed into the survey, said there are a number of models available to trustees beyond fiduciary management.
“Trustees need to think about the alternatives,” said Butcher. “You need to be very careful as a trustee about what it is that you’re buying.”
Alternative options for lightening the load on trustees include the appointment of a chief investment officer to the scheme and “beefing up” a fully empowered investment subcommittee, said Butcher.
However, trustees need to be alert to the inherent conflicts of interest arising around fiduciary management mandates.
“Trustees need to mitigate that conflict by opening it up to competitive tender,” he said, adding that trustees need to think carefully about their precise specification.
“Are you ticking [the specification] off? Or are you being told you’re ticking it off by a person who has a conflict of interest?”
Extending services
John Finch, director at consultancy JLT Employee Benefits, said a number of JLT’s existing clients had extended into fiduciary arrangements.
“You’re already the trusted partner of the client,” he said.
Finch said clients often assessed fees, the quality of service and conduct some market testing, but may not go as far as undertaking a full competitive tender – which can cost £25k-£30k – prior to appointing a consultancy’s fiduciary team.
Finch said clients might ask, “Why do I need to do this?” if by opting for a fiduciary arrangement with their incumbent consultant they are accessing increased services for lower cost, adding that the cost of carrying out a competitive tender could be too big a hit for smaller schemes.
But William Parry, investment consultant at Buck Consultants, said it was crucial for schemes going into fiduciary management to select the structure that was right for their scheme.
“The key way to encourage trustees to use independent providers when they are appointing will come from continued advertisement of the need for them to understand better what is actually going on,” he said.
Parry added that alongside assistance with new appointments, trustees who had been in fiduciary for a number of years were turning to independents to re-evaluate their arrangement.
“They realised when they went in they were doing nothing like the amount of due diligence [needed] – so they’re much keener to engage a third party to both evaluate and potentially run a selection exercise.”
