The LCP Fiduciary Management Survey 2016, conducted in association with Professional Pensions, gained valuable insight into pension schemes' use of fiduciary management. Read about some of the key findings here...
Our survey of more than 100 pension scheme managers and trustees found that while many schemes use an independent adviser for guidance on the appointment of a fiduciary manager, fewer than a third use an independent adviser to review and monitor objectively their performance, underlining the concerns of the FCA.
The fiduciary manager role
Under fiduciary management mandates, trustees typically decide on the overall investment objective, the rate of return to target and the level of risk that they can tolerate and delegate everything else as required. This delegation may include strategic asset allocation, liability hedging, fund manager selection or replacement, and the overlay of tactical views. In practice there is a wide spectrum of approaches and the extent of delegation can vary both between schemes and over time. Some schemes count partially delegated mandates as fiduciary because there is an element of discretion - for example, an absolute return mandate across asset classes or managers.
Around 40% of respondents to our survey identify faster investment decision-making as the key reason for considering using a fiduciary manager.
As figure 1 shows, other reasons for considering using a fiduciary manager highlighted by schemes include: reduction of investment risk; increase in investment returns; investment in a broader range of assets; and the ability to make more informed investment decisions.
That being said, it is clear that there remains a degree of reticence amongst pension schemes about the delegation of investment decisions, with over a third of survey respondents saying that the primary reason that they would not appoint a fiduciary manager is because they do not want to outsource decision making completely.
Interestingly, those respondents whose schemes only partially delegate assets to a fiduciary manager report higher levels of satisfaction across the board - including for reduced investment risk and in making more informed investment decisions - than those whose schemes outsource all decisions.
While fiduciary management can be a good solution for some pension schemes, it does introduce a number of considerations and challenges. The challenges of fiduciary management are readily visible, particularly when considering conflicts of interest and fees.
Of those survey respondents with fiduciary management already in place, 80% cite concerns about identifying a suitable replacement - and the transition process - should the need arise. Fiduciary management mandates are often complex to set up and can be even more complex to unwind later on.
Investment consultants traditionally advise trustees on asset manager selection without fear or favour. However, where fees are based on assets under management a fiduciary manager may not be incentivised to select external funds, even if other managers have more expertise or favour lower-fee funds or asset classes, and even if these may be more aligned with trustees' overall investment objectives. Can pension trustees be sure they are getting access to the best managers and asset classes? Furthermore, under this model fees are often noticeably higher than an advisory model due to the increased reliance on active management.
Also cited were additional concerns about transferring assets to insurers via buy-in or buy-out transactions. As fiduciary managers have an incentive to maintain and grow assets under management they may be less inclined to raise proactively de-risking opportunities to their clients. Insurance arrangements such as buy-ins reduce assets under management and therefore undermine the fiduciary manager's long-term income stream. Can pension trustees be absolutely sure they are getting advice from their fiduciary manager that takes the broadest view of their situation and is wholly in their best interests?
Selection and oversight
Choosing the right fiduciary manager is a complicated business. Fiduciary management is still a relatively new concept and few schemes have extensive hands-on experience of appointing or dealing with a fiduciary manager. The fiduciary management market is complex and undergoing constant change - as well as scrutiny - meaning it is vital that trustees consider all the options open to them in order to find a manager that is the best fit for them.
However, despite the appointment of managers being relatively unchartered territory for many, when it comes to assessing a range of providers, 41% of respondents say they had considered only one fiduciary manager during the selection process - despite there being many managers to choose from. Of the 59% that considered more than one manager, just over half of these had only invited two or three fiduciaries to participate in the process.
However, once appointed, one question that cannot be overlooked is the ability and mechanism by which trustees can maintain independent oversight of the fiduciary managers' actions.
When it comes to monitoring the performance of fiduciary managers, the vast majority of respondents who use such services say they review the performance of their manager on a quarterly basis (73%). Surprisingly, 12% say that they review only on an annual basis.
On a day-to-day basis, under a structure where fiduciary management operates with no independent oversight, trustees delegate authority to a fiduciary manager to set the asset allocation benchmark and select and appoint asset managers. But who is monitoring the fiduciary manager? Furthermore, where a scheme appoints the fiduciary management arm of their investment consultancy firm, there are inherent conflicts of interest.
Notwithstanding these dangers however, while 65% of respondents state that they received advice from an independent third party on which fiduciary manager to appoint, only 20% of respondents receive third party advice on continually monitoring the performance of their scheme's fiduciary manager. Consequently many schemes are left without objective oversight of the appointed manager. See figure 2.
Interestingly, some of these concerns appear to be echoed in relation to the regulation associated with fiduciary management, with 57% of respondents stating they would like to see change from the FCA review.
The two main areas they would like to see change concern the selection process and independent advice, with almost a third (29%) believing that the FCA's study should result in new regulations and/or disclosure rules around the fiduciary management selection process and 18% believing it should result in a requirement for independent advisers to oversee the advice provided by the fiduciary manager.
Although the appointment of a fiduciary manager can have meaningful benefits for trustees, as long as the risks remain evident and uncertainty still prevails, having the right governance framework in place is key to getting the best out of their fiduciary manager.
Choosing a fiduciary manager is one of the most important decisions a scheme trustee board can make. Not only can it be costly and challenging to set up, it can be even more so to unwind the often complex investments. An independent consultant can assist with establishing a suitable governance structure and in setting the mandate objectives. They also play a vital role in objective ongoing monitoring of the fiduciary manager, allowing trustees to have confidence in their arrangements and advisers.
As leading experts in investment strategy and fiduciary manager selection and monitoring, LCP has seen an increasing number of requests to help clients with the fiduciary arrangements, giving clients the control they need to make decisions through clear, unequivocal and independent advice.
Clay Lambiotte is an investment partner at LCP
