Blog: What observations can we make as fiduciary management in the UK gets ready to take off its training wheels, with early adopters having racked up a few years' experience and an ever-increasing acceptance of the model among UK pension plans?
The early experience of fiduciary management has been by and large very favourable.
The training wheels of fiduciary management represent improving a pension fund’s investment strategy: primarily reducing risk by hedging interest rate risk and putting further derisking triggers in place.
If the success of fiduciary management is largely attributable to improving investment strategy, how will it in future?
And how will it fare when it has to deliver what is says on the tin – ie to manage assets?
The early experience of fiduciary management has been by and large very favourable.
The training wheels of fiduciary management represent improving a pension fund’s investment strategy: primarily reducing risk by hedging interest rate risk and putting further derisking triggers in place.
If the success of fiduciary management is largely attributable to improving investment strategy, how will it fare in future?
And how will it fare when it has to deliver what is says on the tin – ie to manage assets?
Competitiveness in fid man tendering
Source: Russell Investments
There is a risk that most pension plans will be disappointed by the next phase because schemes are appointing consultants to be asset managers.
These are the very same consultants that presided over precipitous falls of funding levels of their clients in the first instance.
The same consultants, with the same culture, skills and expertise are now charging materially higher fees from their clients with the promise of a better outcome.
[Same ingredients] – [higher fees] = [worse expected outcome]
Will pension funds heed the warning in time or will they not realise their predicament until they have fallen over, yet again, under the guidance of their trusted consultant – this time masquerading as their fiduciary manager?
Fiduciary management requires investment decisions to be made in real time with imperfect information. Making decisions is anathema to a consultant, let alone making decisions with imperfect information.
Consultants claim they understand the needs of pension fund better than asset managers – that being actuaries, they understand liabilities better.
If this were the case why did they recommend investment strategies that were so misaligned with the needs of pension funds?
Will pension funds heed the warning in time or will they not realise their predicament until they have fallen over, yet again, under the guidance of their trusted consultant – this time masquerading as their fiduciary manager?
Why was the interest rate risk of liabilities ignored? You don’t need fiduciary management to address these shortcomings.
Anyway, the needs of pension funds are not that complex – in order to pay benefits they need to generate investment returns to augment contributions made by the sponsor.
In order to generate investment return, pension funds need to take certain risks. How much return is needed is a straightforward calculation given sponsor contributions, among other things.
Different assumptions fed into different models will indicate the different levels of risk needed to achieve these returns. Even if one could ascertain which set of theoretical risk-return projections is less wrong, it is not the right quest.
Consultants and actuaries will certainly not help pension funds pay benefits – it takes more than manipulating assumptions and modelling theoretical outcomes (which never come to fruition) to pay actual benefits.
This requires generating actual returns. Generating actual returns requires actual investment management.
As the training wheels come off, it’s time to ditch the fantasy models and theoretical portfolios in favour of real fiduciary management.
Shamindra Perera is head of UK pensions solutions at Russell Investments
