Will the FCA market study revolutionise pensions?

But it is a progressive report that should lead to long-term positive changes for the UK savings industry.

Instead of focusing too much on the study’s immediate recommendations, the signals for the direction of travel are more important – and this is encouraging.

While many of the findings relating to asset managers and value for money might appear harsh at first sight, they do not depart radically from the transparency and reporting obligations covered under other FCA regulations and MiFID.

The industry could go a step further and provide regulatory equivalence for trustees or advisers that provide asset allocation and fund selection services

Consultants under scrutiny

Most interesting for the pensions industry is the focus on the role of consultants and the idea of bringing them into the regulatory framework.

This is driven by the recognition that smaller institutional investors in particular rely on investment consultants when making investment decisions.

The FCA is clear that consultants need to improve their ability not only to identify superior managers, but also to prove they actually add value when making asset allocation recommendations.

Currently, buyers – trustees or individual savers – often lack the adequate mechanisms to assess whether they do or do not.

The FCA laments the absence of any standardised framework, comparable with those developed by asset managers at the request of their customers, to measure the quality of advice consultants offer and the value for money they deliver.

Asset allocation is key

Underlying all this is a new, and welcome, emphasis on the role of asset allocation.

As the FCA notes, “asset allocation is likely to be a crucial determining factor in long-term investment performance”.

What we are seeing is growing recognition that when asset allocation is not undertaken by regulated asset managers, ie by trustees and their consultants, it needs to be regulated in just the same way asset managers are.

Consultants and trustees often make the most important decisions on asset allocation and risk. So it is critical that they are held independently to account for picking asset class weightings and strategies, just as managers are for picking stocks or bonds within these strategies.

The FCA does not fully specify who is the lead fiduciary to the pensions saver and who should take responsibility for governing the asset management decision on behalf of the end clients. 

There is a potential danger that asset managers get forced into this role, even though they do not have the necessary control to effect it.

Few asset managers have direct relationships with end clients. Nearly all such relationships are intermediated by ‘professional buyers’, in most cases trustees.

Extend regulatory purview

The industry could go a step further and provide regulatory equivalence for trustees or advisers that provide asset allocation and fund selection services to savers or pension plans – in the retail space, this equivalence would be afforded to platforms.

This shift would require all these bodies to be classified as asset managers and responsible for providing the same level of disclosures to end investors as FCA-regulated asset managers.

The alternative would be to reclassify them as retail investors, which would require asset managers to take on a much greater fiduciary role in the relationship. Either way, this would constitute a true game changer for pensions.

Assessing long-term impact

The FCA study’s stipulations may not revolutionise pensions in the short term.

But in future, trustees and their consultants are set to take fuller responsibility for the decisions they make on their members’ behalf.

This greater scrutiny could lead to a big shake-up of the UK’s pensions market. Trustees would have to decide whether they are retail or professional investors and meet the same stringent standards as other asset managers.

This should lead to greater accountability for the outcomes achieved and, ultimately, to better outcomes for pension scheme members.

David Hutchins is head of EMEA multi-asset solutions at AllianceBernstein