Roundtable: William Parry from Buck Consultants, HR Trustees’ Giles Payne, Russell Investments’ David Rae, Ralph McClelland from Sackers and Towers Watson’s Pieter Steyn, meet to discuss the pros and cons of fiduciary management, in the first of a four-part roundtable series.
Giles Payne: From my experience, it is a mixture of two drivers. One is dissatisfaction with how trustees have been achieving their investment goals and the other is governance.
There is recognition that investment is getting more and more complex. The governance time required to achieve results from that goes up. We came from a position where a lot of the schemes had very siloed investment allocations and there was not very much being done between those silos.
By going into a pooled arrangement within fiduciary you get access to a much wider range of asset classes and opportunities which can improve the risk return of a fund and therefore improve the funding, so it is a case of trying to get a better solution to the investment issues that current trustees face.
David Rae: Pension funds and trustees are looking for a unique solution for their individual circumstances. The first thing is this idea of outsourcing through an investment management agreement, and the second thing is the focus of the engagement is around that individual scheme and the trustees’ objectives.
Pieter Steyn: In its fullest form, we see fiduciary management as the combination of strategic advice and the execution of that advice. We think that is the fullest definition of fiduciary management; yes, there are other versions of it but that is the full definition we see.
By going into a pooled arrangement within fiduciary you get access to a much wider range of asset classes and opportunities
Giles Payne, HR Trustees
For most schemes, defined benefit is a legacy issue; it is something that they want to have a plan for to close out in a number of different ways. But it is quite fragmented in the UK.
One of the propositions from fiduciary management is it provides scale to deal with the issue, because if a fiduciary manager can amass a certain amount of scale, they can exercise considerable cost control, which I think is a good thing when you are dealing with a big issue.
Then there is the access to professional risk management. That is quite an important element in dealing with a legacy DB issue and fiduciary managers have all the expertise.
Ralph McClelland: It is not just the trustees that are concerned about these issues. You are also looking at an employer who may well be acutely interested in how the independent trustee board is addressing things like volatility on the balance sheet and they might be quite keen to push this solution if they perceive there to be risks, either on the governance side or indeed just on the investment strategy.
William Parry: Trustees are able to hand across a lot of the implementation, which is beneficial both in terms of getting things done where they have struggled to make decisions and also the speed of the implementation and the speed at which market developments can be reflected in the assets.
This is possible because fiduciary managers are operating much closer to day-to-day market movements.
Handing across control also frees trustees up to be able to focus on the wider goals they should be looking at.
McClelland: My experience is that it is smaller schemes that are introducing this. There are some notable exceptions, but where I have been involved in appointing managers it has almost invariably been small schemes who are the ones who are most likely to be afflicted by these problems around governance.
From a legal perspective – and trustees need to understand this – you do not absolve yourself from the responsibility for the investment performance by appointing a so-called fiduciary manager.
You still need to understand and engage with what your manager is doing and, of course, yes the core of the market at the moment for these sorts of managers is the smaller trustees, who have recognised that they maybe do not have the expertise, that they have some discomfort.
Payne: I certainly know that one or two larger clients that I deal with are using fiduciary management within segments of their portfolio.
We have seen examples where the trustees believe they are in an advisory relationship but the provider believes it is a fiduciary management relationship
David Rae, Russell Investments
So, again, it may be that they are very confident about the overall strategy of the scheme, the balance between the assets, but they say, ‘Actually, we do not have capacity to go out and research hedge funds and our consultant has a very good research capacity and therefore we will put together a better mixed basket of hedge funds to provide that solution within the parameters that we want to set out.’
It is not an all or nothing fiduciary manager decision; it is very much trying to fit it into areas of your portfolio where you think it could be performed better by external sources.
Parry: How trustees actually go about implementing fiduciary management has often been driven historically by where they are initially approached from. It could be a consultant suggesting it is a sensible idea, or an investment manager saying, ‘You can actually access a much wider range of our funds through this particular offering we have.’
Whichever it is, having an offering that the client particularly resonates with comes back to the importance of tailored solutions on a client by client basis.
Payne: Trustees, ultimately, are trying to pick a fiduciary manager who they believe has the best chance of producing the returns that they and the company require.
That is always going to be net returns. It is understanding there is a drag associated with the costs, that sometimes you just have to be happy that the skill can overcome that drag.
Pensions Expert: Are there strategies on offer in the market at the moment that present themselves in the guise of fiduciary management, but do not actually offer that?
Rae: You ask six people to define fiduciary management you will get six different definitions, and in some ways that is understandable. We have certainly seen simple asset management outsourcing dressed up as fiduciary management.
We have seen examples where the trustees believe they are in an advisory relationship but the provider believes it is a fiduciary management relationship, and I think there is almost an industry-wide lack of definition.
Whether we will ever get to a complete definition I am not sure, but in many ways I think the industry will mature such that pension funds are being helped to assess their providers on the basis of their circumstances, their change in funding level and how and why that has been achieved.
Read the other three sections of this roundtable series:
