New requirements on trustees to shop around for fiduciary management and challenge their advisers will generate better value for members, experts have said in response to measures set out by the Competition and Markets Authority.
On Wednesday, the watchdog published its final report into investment consultancy and fiduciary management, maintaining its finding of an adverse effect on competition in both sectors.
A largely unchanged verdict on the market’s dynamics confirmed that while there are few barriers to entry and no significant market concentration, trustees fail to engage as well as they might with providers, in some cases because of a lack of accurate information.
In fiduciary management, the CMA reiterated that incumbent consultants have an advantage over other competitors. It has carried forward its central recommendation that schemes choosing a fiduciary manager for the first time must tender for the service, a step that can significantly reduce fees even if the scheme stays with its original provider.
The remedies in full
Trustees must tender when delegating allocation decisions for more than 20 per cent of scheme assets. If they have previously done this without tendering, they must tender within five years. Minimum three participants.
Investment consultancies that also offer fiduciary management must separate marketing of FM from investment advice.
TPR asked to provide guidance to support trustees demanding and using increased information from advisers.
Fiduciary managers must provide more information about fees to prospective customers, including transition or exit costs.
Standardised performance track record reporting must be used by FM firms.
Trustees must set strategic objectives against which they can assess investment consultants’ advice.
Investment consultants must report the performance of recommended asset management products to an agreed set of standards.
FCA’s remit should be extended to cover all investment consultants’ activities.
FCA should continue to oversee asset management fee reporting.
DWP should pass legislation to give TPR right powers to improve trustee decision-making
Remedies up ante on value for money
Minor tweaks have been made to its remedies, however. The requirement to tender will now apply to all delegations of responsibility for more than 20 per cent of scheme assets, and trustees will have to invite at least three managers to tender to demonstrate a competitive tender.
A recommendation that marketing of fiduciary managers by investment consultant colleagues come with a warning has been replaced by a requirement to separate out marketing and advice completely, after complaints from consultants.
We had heard from our scheme members for some time that they were worried about the misalignment of interests
Caroline Escott, PLSA
The Pensions Regulator is expected to set out guidance for trustees on how to run competitive tender processes for both services, and legislation will be required to give it the power to oversee these areas.
Meanwhile, the Financial Conduct Authority’s regulatory perimeter will be extended to include all the main activities of investment consultants. Fiduciary managers are already regulated by the FCA.
The review was welcomed both by smaller consultancies and the so-called ‘big three’ of Mercer, Aon and Willis Towers Watson, who offer fiduciary management and have been the central target of the CMA’s investigation.
XPS Pensions head of investment Patrick McCoy said the remedies would “break the stranglehold” of firms offering both consultancy and fiduciary management, while Mercer CEO Fiona Dunsire said the report showed that “markets are not highly concentrated, that conflicts are well managed, that barriers to entry are not significant and that the vast majority of clients are satisfied with the service they receive”.
If those two conclusions cannot coexist in reality, industry players do agree that a refocusing of both the industry and trustees on member interests is a positive step.
“We had heard from our scheme members for some time that they were worried about the misalignment of interests,” said Caroline Escott, the Pensions and Lifetime Savings Association’s policy lead on investment and stewardship. “Cumulatively [the recommendations] should have a really positive impact.”
Tim Giles, Aon’s head of investment for UK & Ireland, agreed, saying that the best practice enforced by the report would “ultimately improve outcomes for all pension scheme members”.
Trustees under the spotlight
Much of that impact will be achieved through new duties on trustees, and the Pensions Regulator's extended remit should put pressure on those who have so far not effectively challenged advisers and fiduciary managers to tender appointments
"It's a little bit disappointing that any trustee has to be told that, it's just good governance," said Rory Murphy, chair of the Merchant Navy Officers Pension Fund, arguing that all advisers should be chosen via tenders. "Any trustee board that has not gone down this route really needs to question why they're trustees."
If the CMA's recommendations are designed to better inform trustees as customers, Murphy said that they should already be taking a hard line on understanding and measuring the quality of advice.
"If you don't understand what the adviser's telling you, ask them to explain and if they don't explain, challenge them," he said.
Life will also change for investment consultancy firms. Where FCA regulation had previously only applied to product recommendations, it will now apply to broader strategic recommendations, which McCoy said were the ones adding greatest value.
The requirement to report the performance of recommended products may also shine a brighter light on those consultants that favour active management and claim to be able to pick outperforming managers in all markets, according to McCoy.
"We say in efficient markets: go passive, and only use active managers to gain exposure to markets you can't get passively," he said.
