Pensions World

How are pension scheme trustees taking to fiduciary management? Slowly, it would seem reports Allison Plager

Well, no one ever said fiduciary management would be the next best thing after sliced bread. And given that, along with accountants, pension scheme trustees are among the most conservative beings on the planet (and rightly so as they are responsible for members’ financial security in old age), it would have been surprising if we had seen a massive upsurge in take up of fiduciary management. Nick Wyld of Muse Advisory describes it as “a slow burner with a long fuse”. Quite apart from anything else, the selection process can “take several months, with sorting out the contract taking a long time”. Finding the right fiduciary manager is crucial so it is worthwhile being thorough.

Table 1 provides information about a selection of fiduciary managers and Table 2 details of the services they offer. They include the dedicated providers such as Mn Services and Cardano and consultants who offer fiduciary management in addition to other services; these include Mercer and Aon Hewitt. Is fiduciary management at the top of trustees’ agenda, though?

Interested … to a degree

Trustees have had a lot to contend with generally, with the new tax arrangements for pension schemes and the imminent arrival of auto-enrolment and the National Employment Savings Trust (Nest). But in addition, the wildly fluctuating markets cannot have escaped trustees’ notice, no doubt causing them some concern about their scheme’s investment performance. This is where a fiduciary manager can come into play.

The difficulty for trustees is how to react timeously to changing markets. They only meet a few times a year and are unlikely to possess the expertise to make the best decisions. An investment consultant will go a long way in providing advice, but a fiduciary manager effectively takes over the investment process: managing the entire portfolio, hiring and firing investment managers, dealing with asset allocation decisions, etc, depending on the parameters set by the trustees. “Possibly one of the main values of appointing a fiduciary manager is that it gives the pension scheme immediacy”, says BlackRock’s Michael Marks. “Can trustees make investment decisions quickly enough to keep up with the currently volatile markets?”

So how interested are pension scheme trustees in appointing a fiduciary manager? Some are putting a cautious toe in the water certainly, but there has been no great rush. As Colin English of Mn Services says “a slow take up is to be expected as the UK pensions market is unlikely to embrace a relatively unknown concept that quickly. However, it has gained traction at a faster pace than happened in the Netherlands, which saw pension schemes slow to adopt fiduciary management initially. Equally, from an assets under management perspective, a massive explosion for adoption of fiduciary management in the UK is less likely to occur than happened in the Netherlands. That is because the UK has fewer industry wide schemes than the Netherlands.” He anticipates that perhaps in five years’ time some 50% of pension assets will be under fiduciary management.

Terry Ritchie of Capita Hartshead agrees that “some pension scheme clients are interested in fiduciary management and we carried out several procurement exercises in the last year”. While fiduciary management is aimed at defined benefit (DB) schemes, Mr Ritchie has seen a request to consider appointing a fiduciary manager from a trust based defined contribution (DC) scheme, although he is not aware that any of the current providers handle any such schemes. He suggests that this is an area to which fiduciary managers may need to give attention.

According to Investment Solutions’ Umar Ilyas “some are very interested once the concept is explained properly and how using a fiduciary manager can help meet their key objectives”. He considers education and training to be “key”.

Greater clarity

Lack of knowledge may indeed be holding back trustees and, to help overcome this, Mr Ritchie says that Capita Hartshead holds workshops about fiduciary management which “can help trustees understand the concept and explain the subtle differences between the players in the market”.

Mr Ilyas says that there is a “mixed response” as to how well trustees understand what a fiduciary manager does. “Some of them don’t understand the concept initially, but once it is explained to them properly”, and here Mr Ilyas reiterates the importance of education, “they can quite clearly see the benefits. Understanding exactly what is required to meet the key objectives for the various stakeholders gives greater clarity as to how much governance is actually required. Of course, no trustee board is the same and the structure or solution proposed has to meet the needs of the scheme.”

Mr English agrees that lack of understanding as to what they do is the main deterrent to appointing a fiduciary manager. He says “it can be difficult to fully explain on paper, which is why face to face meetings are so important to ensure understanding. Under the Mn model, nothing is delegated to the fiduciary manager unless the client says so. The decision making framework is very flexible and adaptable to reflect changing circumstances over time, with the result that the trustee board retains full control of decision making as appropriate to their particular circumstances and requirements.”

Size can also be a barrier, as fiduciary managers may not offer their service to funds under a certain size, although Mr Ritchie points out that “some fiduciary managers do accept smaller funds”. For example “some would go to £10m or below, but most prefer to deal with funds with assets worth at least £200m”. He feels that “much would depend on the business model of the fiduciary manager concerned”.

In control

Once trustees have got to grips with the concept of a fiduciary manager, when and why will they decide to appoint one? Some trustees might be tempted to think that a fiduciary manager is just another expensive professional adviser, believing perhaps that their existing investment consultant has pretty much got all investment matters in control. This may indeed be the case and, especially where the trustees have a good understanding of investment issues and feel in control, may be sufficient.

However, Mr Ilyas says that “when a scheme has insufficient investment resources and as such does not have an effective governance structure internally, the need to delegate some responsibility to an external fiduciary manager may help the trustees and the scheme meet their key objectives”.

He mentions that “traditionally, pension schemes (especially small to medium sized schemes) have been limited by their inability to respond quickly to changes in investment markets to capture opportunities on behalf of their members. Therefore, over the past few years, interest has been growing to see how trustees can better meet their key objectives and the high level strategy, by extending their governance resources.” He suggests that fiduciary management can offer “a viable solution to help with governance requirements facing trustees. The key issue is to examine what exactly is offered under the ‘bonnet’ and how this helps the trustees.”

Muse Advisory’s Nick Wyld suggests there are two main reasons why a trustee would appoint a fiduciary manager. First, he notes that “running a scheme is very complicated and a drain on resources” and most trustees do not have the time to deal with investment changes, although “this depends on how the trustee board is organised”. Second, he says “the nature of pension fund investment has changed: it is a greater financial burden, or at least, challenge to the sponsor company”. Investment is now “all about minimising the financial risk to the company, so anything the trustees can do to get funds onto an even keel will help”.

Commenting on how suited fiduciary management is to UK pension schemes, Mr English says it is appropriate “because trustees are realising that the complexity of investment markets and turmoil in the financial markets result in the need for additional resources to be available to trustees and a speedy decision making process established to help manage and improve funding levels. Fiduciary managers can assist because they will be monitoring the investments and risks inherent within any client’s portfolio on a continuous and integrated basis.”

Timing

Anyone who thinks that pension scheme trustees are going to embrace fiduciary manager en masse is probably going to be disappointed. But the importance of good investment cannot be overestimated. So many DB schemes are running at a deficit, which means that trustees have to give more and more of their attention to investment.

As Mr Ritchie says: “Fiduciary management is a sea change in the governance model of how schemes are run. Trustees need investment knowledge to control the pension scheme, but given that most trustees are busy lay people, they are unlikely to have the time to manage the investment aspect efficiently. Fiduciary managers should help with that because they can look at the portfolio constantly and make decisions as and when required, rather than have to call another trustee meeting or wait until the next one. It is worth remembering that, although fiduciary managers can make quick decisions, these must always be within the parameters set by the trustees.”

“The concept is most definitely a step forward in the way that pension schemes are governed”, says Mr English who feels that most specialist fiduciary managers can “demonstrate significant added value”.

Trustees should not worry about the possible perceived loss of control which they may see as a disadvantage of appointing a fiduciary manager. Mr Marks says: “There is a fear of change, even when the change could be an excellent way forward. It takes time for people to get used to an idea, but the pioneering pension funds will help and show what fiduciary management is. Trustees are not relinquishing control when they appoint a fiduciary manager, rather they are enhancing it. The fiduciary manager should provide transparency and information to help the trustee run the pension fund and allow for quicker reaction and response to the changing funding positions and changes in the markets.”

Greater delegation of investment matters may prove a boon to trustees of DB schemes.