How can pension schemes compare fiduciary managers?

Patrick McCoy: The case for fiduciary management is unproven in the UK. What everyone wants to see is whether it is better than the traditional advisory approach, and we do not know that at the moment. There is not enough evidence to prove the case one way or the other.

The second point is there are probably two providers in the UK that show genuinely well-rounded track records… so it is very difficult to pick someone on past performance. Therefore, what you end up doing is looking at the constituent parts [and] you say, ‘Right, they have got eight jobs to do… show me a track record and evidence of each of the different parts’. Then you hope that when they add it together it gives you a good outcome.

Brian McCauley: You have to understand what the client is looking for in an open tender... and how you compare them. You need to look at their commitment to the market and track record, understand the parameters they use in their fiduciary management [and ask] how do they achieve the objective of their underlying clients.

Christy Jesudasan: Comparing fiduciary managers is a challenge. You have different providers from different backgrounds providing different levels of service, and ultimately to different and unique clients. I think it’s more important to understand the drivers behind the performance; what is driving the movements in the funding ratio?

If you sit down with each provider and actually try to assess how they are working with a client on an individual basis you can come up with some quantitative and qualitative factors to try to assess their capabilities.

Our experience... has taught us the importance of measuring success. Right from the outset we will agree with our clients on key performance indicators. These include not only the funding and investment performance but also soft factors that assess the strengths of the relationship, such as the quality of advice, proactiveness, timeliness, accuracy and relevance. Including these quantitative and qualitative measures as key performance indicators ensures that the fiduciary manager is explicitly aligned to the client’s key objectives.

McCoy: The bit that is really hard to measure is the advisory piece. So, what have you taken? You have taken advisory and execution, and quite often lumped together. Fund managers have been used to being monitored in the past and that is relatively easy – consultants less so. And in addition, measuring the advisory piece is more difficult.

Anton Wouter: Maybe I should pose a question: is the old structure proven?

McCoy: I did not say it was better or worse. I guess there is more focus on seeing whether fiduciary management works. The debate about whether the consultant model works has rumbled for a long time, but most agree that setting strategy which the consultant focuses on is critical.

Wouters: My opinion is still that if you look purely at the old investment element – ie investing money – fiduciary managers appear slightly more expensive overall than maybe a consultant is at the moment. However, this is because, as you said, the fiduciary manager offers additional services.

Jeremy Goodwin: Actually, with costs, there is a [sense that] if the fiduciary manager appears to be cheaper than others, there is often a reason for that.

This could be, for example, that the kind of investments involved are going to be a lower-quality investment, or the kind of service is going to be lower. So, again, it is not necessarily the case you want to go for the cheap fiduciary manager, because you often are paying for what you get.

Shamindra Perera: Most pension funds’ current circumstances dictate a fairly narrow range of different strategies that they can adopt.

Given the relatively limited range of strategy choices available, funding level outcomes are impacted as much by implementation and execution as... by strategy.

We really need to focus on how important execution is and how important day-to-day management is. I am not saying strategy is unimportant, but from a starting point of, ‘This is where we are. These are the constraints’, the strategy lever is not anywhere near as big as we think it is.

McCauley: We can do more to measure the strategy and the medium-term view. You can come up with your headline strategy, but I completely agree that there will be limitations on what the headline strategy can be and how you measure it. I do not think we should hide behind that and not measure any part of it, because we should be measuring it and I think that we can. It is not beyond us, by any stretch of the imagination.

Wouters: The difficulty in investment committee meetings is the question of who has the ultimate responsibility, for example, if the decision is taken to go plus 10 per cent or minus 10 per cent on interest rate hedging. Is it the investment committee, with the board of trustees, or is it the fiduciary manager? Of course, you need to be transparent about such a decision, because it is a deviation from the asset allocation you have agreed together. But the accountability and the responsibility should also be very clear.

So, for me, the really pertinent questions are: how much freedom does the fiduciary manager have; what is the extent of the joint responsibility of the board of trustees and the fiduciary manager in their partnership; and finally, what constitutes the sole responsibility of the board of trustees, given that they have the ultimate responsibility?

Goodwin: One of the things with fiduciary management is you do potentially get an increase in the advisers involved in relation to the trustee work.

Actually, one of the issues which causes a problem in relation to contract negotiations at the start is that trying to put contracts in place can take up to six months, and one of the things that you are doing during the course of all that time is actually trying to work out who is responsible for doing what. So, if something goes wrong, you do not want everyone to be turning around and pointing the finger at everyone else; you want to be very clear as to actually who is responsible for doing what and what are their standards.

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