Buck Consultants' Jacob Rubin and Brian McCauley clarify the benefits of fiduciary management and explain how to assess performance, in this week's Technical Comment.
This is evident in the fiduciary management survey we commissioned in July 2014, which reported that 29 per cent of participants that had not put in place fiduciary management mandates said it was because they were “not clear of the benefits”.
Key points
The most important criteria will be scheme-specific.
Performance can be measured against risk, against the market, against peers and funding.
Use both qualitative and quantitative metrics.
The support of independent and trusted advisers to assist the sponsoring employer or trustees in this task is of growing importance, in addition to fiduciary managers becoming more transparent and public in demonstrating how they add value.
While there is a range of criteria to review when monitoring a fiduciary manager, those of greatest importance will be dependent on each pension scheme trustee board’s specific requirements.
However, when assessing a fiduciary manager’s offering, a pertinent starting point is a review of the resources available and management’s role in ensuring that all the underlying components of the solution are able to work effectively, without undue constraints or conflicts.
Other factors involved in assessing the performance of a fiduciary, which are more qualitative in nature, include the level of tailoring offered, quality of the fiduciary management team and involvement of company-wide resources.
These are aspects that require regular meetings to monitor and often require experience and expertise to critically evaluate.
Track record
While there is the ever-present cautionary note that 'past performance is not always a guide to future performance', it is important to assess performance.
This should focus on testing the understanding of the fiduciary manager's approach and an assessment of whether it has achieved returns consistent with the expectations. In the varied and tailored world of fiduciary management mandates, in theory no two trustee boards' objectives and guidelines will be the same.
However, a track record of adding appropriate value for other clients, particularly over longer and more challenging periods, is a key measurement metric.
It is not just about demonstrating outperformance, but assessing whether the level of performance achieved is sufficiently impressive given the opportunities presented by the prevailing environment and the objectives of their clients.
A number of fiduciary management solutions on the market employ a fund-of-funds approach, making manager research and selection of vital importance.
Drilling down into underlying manager performance can be time-consuming and sometimes misleading, but assessment can help the trustees understand whether the fiduciary manager is generating excess returns through its individual managers relative to market indices. It is important to understand the components of the absolute outcome and if it is in line with expectations.
By having a clear understanding of how a fiduciary manager operates and expects to perform from the outset, trustees, along with an independent third-party evaluator, can critically assess performance throughout the lifetime of the fiduciary management appointment.
Performance can be assessed in a number of ways: risk-adjusted return metrics; asset returns relative to traditional relevant market indices; peer-based comparisons; or a more holistic funding level view.
There is no one definitive way of assessing the performance of a fiduciary manager, but the use of a number of different quantitative and qualitative metrics allows trustee boards to better understand the success, or otherwise, of their fiduciary manager.
The marketplace has grown rapidly in the UK in recent years, and 87 per cent of participants in our recent survey stated their belief that it will continue to grow.
However, the realisation of this anticipated growth will require fiduciary managers to continue to communicate the benefits of strategies, and third-party evaluators to critically assess and support trustees' understanding.
With a number of early-mover pension schemes three to five years into a fiduciary management arrangement in the UK, now is the time for experiences to be shared with other schemes and to test whether the theory has become a reality.
Jacob Rubin is a senior investment analyst and Brian McCauley a senior investment consultant at Buck Consultants
