Where is innovation coming from in fiduciary management?

Pieter Steyn: We have found that the scale and decision-making powers from having a fiduciary management business enables you to engage with the investment management industry in a different way compared with when you are acting only as an adviser.

The investment managers listen when they know it is your decision and they don’t have to go through further selection processes. This enables you to have a different conversation.

On the governance side we have been observing some innovation too. We see the amount of time and the quality of thinking that goes into strategy and oversight increasing materially as the fiduciary mandate structures evolve over time.

We have realised our clients require better management information around strategy; their discussions now largely focus on risk, return, covenant and funding level.

Ian Smith: Is it allowing you to push down the fees with asset managers?

Steyn: Yes, it is possible to do that, because when you buy as a fiduciary manager, you don’t buy on behalf of just one client.

The benefit to an asset manager is that they do not have to go to additional beauty parades and they do not have to service multiple individual clients.

Our clients require better management information around strategy; their discussions now largely focus on risk, return, covenant and funding level

Pieter Steyn, Towers Watson

Shamindra Perera: One of the areas of innovation the market needs and that we are focused on is to balance the focus we have today on hedging interest rate risk with the need to pay benefits.

While attempting to hedge what is one of the dominant risks in pension fund portfolios is the right thing to do, one of the casualties of this focus has been the ultimate challenge of paying benefits. Strategies that better match liability cash flows are therefore an area of focus and innovation.

Smith: The problem is the regulatory environment, though, is it not?

Perera: True. There just needs to be a balance between solving the clients’ short-term needs and their long-term obligations, which is to pay the benefits that fall due in 20, 30, 40 and 50 years’ time.

Let’s not forget the need to generate returns and build in some matching of cash flows to pay liabilities. The less traditional, illiquid asset classes that better match the profile of payments that you need in those timeframes have a role in the portfolio.

Carolyn Tavares: I would name two innovations. One is having a better understanding of what the endgame is. Trustees’ endgame might be to go down the insurance route or it might be to be self-sufficient.

However, in either case that does not mean you need a portfolio solely of gilts and swaps. Insurance companies and annuity providers will accept corporate bonds and illiquid assets; it is a perfectly acceptable portfolio for them.

Similarly, if your endgame is to be self-sufficient, it can be very expensive to hold just gilts. In better understanding the endgame, we’ll see innovation, particularly within the matching portfolio.

The second innovation is recognising there are opportunities on a greater variety of timescales. The industry has to evolve to recognise there are cycles that have a material impact on portfolios.

It is about asking, ‘Where are we in the current economic cycle? Are we in a recovery phase or an expansionary phase?’ These phases typically have timescales of anywhere from two to four years.

However, there is also another timescale, which is much shorter term and tactical in nature, which creates opportunities to add value to portfolios.

For example, earlier this year when we saw equity markets fall by more than 10 per cent and bonds yields fall, we did not change our economic outlook. However, we saw a short-term buying opportunity to rebalance our equity portfolios.

Being able to combine views on different timescales and adjust portfolios in real time is an innovation we are seeing as increasingly important

Carolyn Tavares, GSAM

Being able to combine views on different timescales and adjust portfolios in real time is an innovation we are seeing as increasingly important.

Stuart O’Brien: There are different pressures on trustees now. The regulator’s latest funding code of practice requires trustees to have an integrated approach to the scheme’s funding, the employer covenant and the investment strategy.

It therefore follows that, if the employer covenant or your funding of the scheme changes over time, you would be looking to adapt your investment strategy. And as soon as you start doing that, the idea that you might just appoint a fiduciary manager on a fixed track and just let him get on with it falls away.

I wonder whether providers’ fiduciary management offerings will continue to adapt to that and provide increasingly flexible solutions in line with the code of practice.

Simon Cohen: In terms of innovation, I think technology is part of this: online tracking, understanding what is going on and having the information to help you with that governance burden.

I have seen advancements in terms of what you can do online, models which are interactive: helping manage funding levels, looking at flight paths over time etc.

Brian McCauley: You can have the industry’s greatest minds thinking about how to get the best investment returns or the most efficient investment returns, but if the trustee does not understand what they are up to, you have lost track of what you are trying to achieve.

I would therefore like to see more innovation in being able to tailor the reporting to the trustees’ requirements. That is not the same every quarter; ‘Is our funding level improving or not, and why?’ – that could be one quarter’s report, and the next quarter might be completely different and on understanding the hedge funds within the growth engine and dedicating more time on that.

You could look at all the different metrics throughout three years and what you would want to see would change every time. You have all this great stuff happening up above; do they understand it?

Keep educating them, keep informing them, and keep helping them understand what it is you are doing so great.

This roundtable was chaired by Pensions Expert editor Ian Smith