KPMG's Patrick McCoy, Eversheds' Jeremy Goodwin, Buck Global Investment Advisors' Brian McCauley, Russell Investments' Shamindra Perera, MN's Christy Jesudasan and BNP Paribas' Anton Wouters discuss the fiduciary management market.
Brian McCauley: Clients need to ask why they need fiduciary management – whether it is speed of execution or [because of a] lack of expertise.
Then they need to consider where they have the skills, where they do not have the skills, what they need help with, then go look for the right solutions. Sometimes that answer will be a fully delegated fiduciary solution.
If they identify and know exactly why they want it, there are benefits there that they can achieve.
Pensions Week: Patrick, what does KPMG’s survey on fiduciary management indicate about increased interest?
Patrick McCoy: In 2013, 2.5 per cent of pension scheme assets were in a fully delegated fiduciary approach. It [is] clear that it is currently a small client solution, dominated by the consultants, with relatively little independent oversight. [Those were] the three key conclusions from that survey.
Pensions Week: Was there an increase in the larger schemes or is it just the preserve of the small?
McCoy: There are lots of conversations, not just about fiduciary but government structures and different options. It is a hot topic, but it is still a relatively small proportion of schemes that use the fully delegated approach.
Christy Jesudasan: Historically, we have seen interest in fiduciary management across the spectrum of assets, with our smallest client being £30m and our largest being £30bn in size. In recent years it is at the smaller end of the market – with greater governance challenges and a desire for a more sophisticated strategy – where we have seen most interest.
For us, we don’t look at size, but more importantly whether the scheme has the right level of governance to achieve its long-term objectives. That may be under a highly delegated model or it could be acting as a fiduciary manager working alongside an in-house team, as we do with some clients.
Shamindra Perera: I see a fiduciary manager as an entity that has the expertise to make and execute investment decisions – obviously there is no point making investment decisions on a day-to-day basis unless you can execute them – and manage risk positions on a daily basis.
If you think it is necessary to make day-to-day investment and risk-management decisions at a total portfolio level, trustee boards cannot do it. You either need to build that capability in-house – and I think that a lot of schemes at the larger end are – or you have to appoint an external fiduciary manager. The question of whether you need fiduciary management or not depends on whether or not you believe in the need to manage your pension fund at a total-portfolio basis and on a day-to-day basis.
Jeremy Goodwin: That brings in a very interesting point about fiduciary management, which is the question of scale. Scale is very important… in terms of [which] pension schemes can build that in-house capability… Schemes of £1bn-plus are starting to build these in-house capabilities.
We have had a number of exercises for our largest trustee clients looking at the fiduciary model and saying, ‘Here is what we are currently doing in-house, here is what fiduciary management is doing, how can we improve our in-house capabilities in light of how a fiduciary manager acts?’.
For a small-to-medium-sized scheme, fiduciary management gives it access to something which is akin to a really good in-house investment team who are then able to look at things in a holistic way. That also goes for the type of fiduciary manager you appoint. The sense of scale is very important. When you talk about fiduciary management, it covers a wide range of different entities. It is worth trying to think about that variety and the range of skills you need for a good fiduciary manager. That question of scale is crucial.
Jesudasan: If you think about fiduciary management, one aspect is advice and the other key component is execution. For execution, having the scale of the business to be able to do it in the most efficient manner is important. When you are looking at the different providers, it is important to look at scale.
Select a manager who has the scale to access investment opportunities and services on the best possible terms and conditions. One of the reasons large pension schemes perform well is the advantage of having economies of scale, and fiduciary management is no different. With size you can more effectively get the best deals on fees and operate more efficiently.
Just to give you an example: MN has over £80bn of pension fund assets under management. The most obvious benefit of scale is in terms of the fee levels that we are able to negotiate with custodians, fund managers and other service providers. For example, if we were to invest in a new asset class, allocating just 1 per cent of our clients’ assets brings about nearly £1bn in terms of assets that we could use to fund a new allocation and attain the best possible terms. That is something that smaller, mid-sized, even the larger schemes, would not be able to access immediately. That is where scale certainly plays a part.
Pensions Week: Is scale important to all schemes?
McCauley: If they are looking for fiduciary managers to do absolutely everything and they want that diversification and speed of execution, and if they want a fiduciary manager to part-delegate a solution, scale is important. It is coming back to tailoring to every single client, to what they need. I suppose the more scale you have the more likely you will be able to tailor your solution.
