How to make your providers work harder

This implies that the current regulatory environment starts from an assumption of mistrust, and that customers need to be protected not only against themselves but also from the conflicted interests of agents. 

Economies of scale enforce competition

There are specific questions around whether the structure of the industry acts as an obstacle to putting the interests of clients first.

Pension funds should investigate how best to consolidate themselves and create economies of scale, thereby ensuring a better negotiating position to enforce competition upon their service providers

It is clearly not helpful that, following consolidation, three large groups share a high proportion of the UK pension consulting market.

At the same time, the pension fund market itself is still quite fragmented, containing a large number of small pension funds with resource-constrained sponsoring employers.

Pension funds should investigate how best to consolidate themselves and create economies of scale, thereby ensuring a better negotiating position to enforce competition upon their service providers.

Fees paid to asset managers are a result of the underlying investment strategy and beliefs, and the complexity that results from this.

Pension funds should have sufficient internal resources and clearly independent advice to determine this strategy, and the resulting complexity and fee levels.

Blurring roles: Fiduciaries and consultants

The roles of investment consultants and fiduciary managers often combine advice on both investment strategy and portfolio implementation.

Best-in-class investment governance suggests a separation of strategic advisory and implementation activities, where different parties can be held accountable.

A bundling of these activities within one service provider will result in conflicts, with an incentive to advise unnecessarily complex strategies. These conflicts are made worse if investment consultants and fiduciary managers receive fees based on assets under management.

A bundling of services can be suboptimal; experience suggests that quality can vary substantially depending on the type of service.

The following table summarises the percentage of providers with top quartile scores for each service. For example, 65 per cent of the providers are top quartile in strategic advisory, whereas only 15 per cent are top quartile in the implementation of alternative assets.

Pension funds should ensure they have sufficient resources to be able to source each service with the best provider for that specific service. Once again this requires a certain minimum scale. Over the past few years we have witnessed this phenomenon of debundling in the Dutch pension market.

Competition requires tenders and benchmarks

Often mandates for fiduciary and consulting services are awarded without a tender process or are insufficiently benchmarked.

Tendering and conducting peer group analysis should become a regular activity for trustees who are monitoring the effectiveness of their relationship with their consultants (responsible for strategic advice) and fiduciaries (responsible for portfolio implementation, including manager selection).

Our research suggests that the following four dimensions should be monitored:

• Performance and fees

• Effectiveness of governance and alignment

• Relationships and communication

• Innovation, adaptiveness and thought leadership

For the service providers this results in improved client retention rates, continuous learning led by client feedback and peer group positioning, pro-active anticipation of changing client needs, and pro-active avoidance of costly problems.

Clients on the other hand can make best use of their service providers, exercising a higher level of control to ensure increased market conformity in contractual arrangements and pro-actively avoid pricey complications.

Pension funds should organise themselves in such a way that they are strong enough to take control of their own destiny, with sufficient scale, internal resources and negotiating power. 

This will increase competition in the industry, reduce conflicts and improve funds' capacity to auto-regulate without the FCA having to step in.

Paul Boerboom is chief executive and founder of consultancy Avida International