How to oversee a fiduciary manager for your scheme

When a fiduciary manager is appointed, instead of having to make decisions – based on advice – all the way down the chain, from investment strategy to the selection of individual investment managers, ‘all’ that trustees need to do is select a fiduciary manager, agree their investment strategy and subsequently monitor performance.

Trustees are capable of overseeing their fiduciary managers and input from an external reviewer can add value periodically

This sounds simple, yet increasing questions have arisen around trustees’ general capability to oversee fiduciary managers and the merits – or lack thereof – of appointing an external reviewer.

This has been picked up by the Competition & Markets Authority’s investigation into the investment consulting market. 

The CMA is assessing whether information provided to trustees enables them to monitor the performance of their fiduciary managers. The broader question here is around whether it is possible for trustees to make informed value judgments, and the role of an external supervisor in supporting that.

To cut to the chase, trustees are capable of overseeing their fiduciary managers and input from an external reviewer can add value periodically, or could help to address any specific issues.

Agree objectives

The first key step is to agree objectives with the fiduciary manager. It sounds obvious, but it is not possible to tell how the manager is really doing unless a clear objective has been set in the first place – you can’t score a goal unless you know where the goalposts are.

The ideal is to set an objective linked to improving the scheme’s funding level, for example a return, net of fees, on assets of x per cent above liabilities; this objective should be partnered by an appropriate constraint on the level of risk that can be taken to obtain that return.

Setting a risk constraint alongside a performance objective enables trustees to integrate financial risk management. The objective should reflect the return estimated to be required on the assets to eliminate the deficit over a defined period, when combined with the contributions payable. The risk element should reflect the level of investment risk that the trustees and sponsor have agreed can be supported.

Clear reporting is crucial

The second key step is to ensure reporting is clear and linked to objectives. Once the objectives are in place, reporting from the fiduciary manager to the trustees can focus on progress against objectives.

There are two useful elements to include. One is a high level ‘attribution’ of funding level changes, identifying the extent to which various elements have impacted funding over the period in question. These include, but are not limited to, contributions, investment performance, differences between expected and actual cash flows, unhedged interest rate and inflation changes.

The other useful element is a sensitivity or scenario analysis, which demonstrates how the portfolio could be impacted in the future under a range of different economic scenarios. This enables the trustees to keep the level and source of risk under review.

The third key step is to aim discussions at a strategic level. The first two steps, outlined above, lead naturally to a focus on the strategic level at trustee meetings.

The most important point for discussion is whether the fiduciary manager is on track to deliver the overall objectives within the risk constraints and if not, why not. Focusing on this point will often lead into a wider consideration of whether the sponsoring employer could support an increase in contributions or investment risk to deliver the objectives.

An external supervisor can support the process

This type of discussion, which encourages an integrated approach to risk management, potentially adds more value than spending time on reviewing the performance of individual funds or comparing one fiduciary manager with another.

Adopting these guidelines should equip trustees well to effectively oversee their fiduciary manager, a process which can be supported by an external supervisor.

The outcome of the CMA review may help trustees further by providing tools and templates to help with supervision or by proposing requirements for fiduciary managers… watch this space.

Rachel Croft is a director at Independent Trustee Services