What mandatory tendering will mean for your scheme

It has provisionally proposed some changes it believes will improve competition and help trustees gain more information in order to make more informed choices and get a better deal from investment consultancies and fiduciary management service providers.

Competitive tenders will boost trustee understanding

A key proposal is that, for schemes looking to use fiduciary management services for the first time, they will be required to run a competitive tender.

The mandatory tender process will add an additional layer of governance for trustees, which will increase costs and time spent on such exercises

For those who already use fiduciary management, but did not run a competitive tender, they must do so within five years. At this stage, there is no clarity as to what a competitive tender is and how one will be run.

By testing the market, it will educate the trustees on the different methods used by various fiduciary managers and pick the one that best suits the needs of their scheme.

The investment consultants that have their own fiduciary management service had an incentive to offer their own product and the CMA identified that around half of all schemes would follow this advice without looking for alternatives.

The proposed change will reduce their competitive advantage and should encourage these companies to improve the quality of their service so they have the best chance of retaining clients that consider fiduciary management. Trustees could benefit through a better quality of service and/or more competitive fees.

Expect extra layers of governance and costs

The mandatory tender process will add an additional layer of governance for trustees, which will increase costs and time spent on such exercises.

There are several companies that offer a review of fiduciary managers, and the costs are quite high. Some schemes may struggle to meet them because they have limited budgets, and in some cases the costs are disproportionate to the size of the scheme.

In addition to this, fiduciary management is an area where many trustees are not experts, and while the Pensions Regulator will be providing guidance, trustees will still need specialist advice before making a choice. This adds another layer of costs.

For schemes with an existing fiduciary manager that decide to move to another provider, they will need to factor in the cost of switching, such as the transaction costs for selling funds or exit penalties for the current provider.

This could deter some schemes from moving provider on the grounds that the overall costs are too high, and will therefore question whether a tender exercise is of any use.

The unintended consequence of this regulation may be that investment consultancies with a fiduciary management service will be reluctant to offer this service if there is a risk of losing the client given the significant set up costs incurred when on-boarding a client.

This could limit possible options for trustees, but could also mean trustees need to seek advice from a third party to ensure impartial advice.

In addition, the smaller providers could be put off from offering this service due to the additional costs of being involved in tenders – so, perversely, competition may reduce not increase.

The CMA should consider this before any details are made final, as it could force some schemes to rule out fiduciary management altogether on the grounds of the cost of doing a review of different providers, even if it could be the best option for them and could reduce the number of providers in the market.

Vineet Sood is a senior investment consultant at Dalriada Trustees.