Fiduciary management can not only add value to pension schemes but also offer them improved governance solutions.
However, it has taken an investigation of the sector by the Competition and Markets Authority to see the industry wash itself of allegations of conflicts. The CMA’s final order, published in June 2019, requires trustees to retender past mandate awards within five years and conduct a competitive process for any new selections.
But while the CMA’s remedies are definitely a step in the right direction, there is still work to do on cleaning up the sector’s reputation and improving the transparency trustees have over their providers.
The majority of fiduciary managers do a very good job for their clients, but if services are not separated there should at the very least be a requirement to have independent oversight
Of course, a single stride towards enlightening this area of the market is better than none at all, but have we missed an opportunity to take further steps on this pathway?
Trustees grudgingly accept governance burden
Requiring schemes who have not undertaken a competitive tender to review their existing fiduciary manager mandate is an important first step.
The fiduciary management market has evolved significantly over the past five years and it is important for trustees to be able to assess their current offering against this new landscape
Many schemes have enthusiastically set about reviewing their mandates in 2019-20, but a number of trustees, who run well-managed schemes, have said the order has added to their governance burden.
In fact, some of the trustees I speak to, who now need to review their current fiduciary manager, say they are perfectly happy with the current arrangements and would not be reviewing their manager at this time if they did not have to comply with the order.
That is not to say that they would not switch providers if there were a better option for them, or significant cost savings.
Independence of TPEs welcome
Asking trustees to impartially assess new fiduciary management providers against their current trusted adviser will be tricky.
Guidance from the Pensions Regulator is a useful starting point, but it may make more sense to contract one of many third-party evaluators who can objectively review the whole market.
TPEs can save clients valuable time and ensure proposals are compared against each other on a like-for-like basis – not an easy task for such bespoke mandates.
Ultimately, when assessing fiduciary managers against each other, it is far easier for TPEs who are doing this week in week out to quickly assess which managers have the right toolkit and approach to meet each scheme’s needs and produce a targeted invitation to tender for managers to respond to.
One potential bump in the road on this journey is how many fiduciary management companies will respond to full tender requests, particularly when they consider there being a small chance of successfully tempting a trustee board to switch advisers.
Anyone who has taken part in a tender exercise will tell you it is one of the most time consuming things they can do. Perhaps here too a TPE can help, as they oversee all Fiduciary Managers and can more easily gain a number of quotations.
To date, I have not seen any reluctance from fiduciary managers to quote for review work; perhaps this is an incentive for schemes to review sooner rather than later.
CMA requirements the bare minimum
I was personally disappointed that the CMA order did not suggest an ongoing periodic review of mandates.
The current requirements are for a one-off exercise to be completed for those schemes where a competitive tender exercise has not yet been undertaken. But nothing further? If the marketplace continues to evolve, a five-year review cycle might be more appropriate.
Furthermore, some would say there should be a requirement to separate the source of investment consulting advice from the source of investment management.
CMA takes final step in reform of fid man and consultancy sectors
The Competition and Markets Authority has issued a legally binding order requiring investment consultants and fiduciary managers to provide clearer information about what their customers are getting for their money.
For a fiduciary manager to be responsible for both does leave the door open for conflicts (for example, setting targets that are not demanding enough, designing solutions that suit their suite of funds, or commercial needs).
The majority of fiduciary managers do a very good job for their clients, but if services are not separated there should at the very least be a requirement to have independent oversight, whether this comes from an independent trustee or TPE.
The CMA’s investigation has proven that sunlight is the best disinfectant, but let us not pretend the order will solve all problems with scheme governance. The impact it will have on the fiduciary management market in general is yet to be fully tested.
Amanda Burdge is a partner and head of investment at Quantum Advisory.
