How fiduciary management can work for small schemes

There has been much debate over whether fiduciary management is appropriate for smaller schemes. Or whether – as with many innovations adopted first by the larger pension schemes – the cost is prohibitive given the cash flows involved.

The idea that it is not suitable for smaller schemes in general is ludicrous. But with one large proviso – the trustees have to understand fully what they are entering into in five main areas:

• the risks they are removing;

• the new risks they are introducing;

• how much it will cost;

• what their objectives are, and;

• importantly, how they are going to monitor progress towards those objectives.

Fiduciary dilemma

Many trustees feel handing over as important a part of their responsibility as determining an appropriate asset allocation is akin to shirking their duties.

On the other hand, trustees, particularly those of smaller schemes, have difficulties in keeping on top of the raft of investment options, market fluctuations and derisking opportunities available to them.

Can a group of individuals with other day jobs and responsibilities, time pressures and limited resource really be expected to determine the optimal strategy for their scheme and to revise this regularly enough to ensure it remains optimal?

In a large scheme, with an investment subcommittee and the resources to engage proactive and innovative investment advisers, the answer is possibly yes.

But in the main, smaller schemes will be less able to make quick decisions to act on advice, will be less aware of the options available and have less time to research and engage with providers.

Rather than being something more appropriate for their larger brethren, fiduciary management ought to be considered seriously by the smaller scheme.

Appetite from small schemes

So why are we not seeing a rush of small scheme trustees knocking down the doors of fiduciary managers across the country to engage in their services immediately?

Well, in some ways we are and the answer comes down to the way in which we define ‘fiduciary management’.

Many of the trustee boards we come across are changing the way in which they use their investment advisers and are investing in funds with broadening mandates to allow greater diversification and discretion from their managers.

This stops well short of the traditional definition of full fiduciary management but shows an appetite to move in that direction.

Some small scheme trustees have tackled the problem by appointing an investment professional to their board. Not only to help select and challenge advisers, but also to take quick decisions on their behalf regarding asset allocation, within the bounds of a set of agreed parameters. Is this not a form of fiduciary management?

An interesting side effect of appointing a fiduciary manager – of any degree – actually seems to be an increase in trustee engagement with their investment strategy.

As soon as a third party is responsible for making the day-to-day decisions – whether to invest in index-linked bonds as inflation inevitably creeps upwards, fly to the safe haven of arguably over-priced gold or to risk it all on the equity market – trustees are much more able to take a step back and objectively review someone else’s decisions.

The trustees’ role then changes to one where they monitor the activities of the individuals they have appointed to manage their strategy – looking closely at the rationale behind decisions and regularly assessing performance relative to sensibly-agreed benchmarks which are mindful of the scheme liabilities.

Marian Elliott is director at Atkin & Co