A fiduciary in sheep's clothing? Fiduciary management v OCIO

This approach to investment management seeks to provide trustees with additional support in making investment decisions and facilitate greater delegation without calling for the near-total delegation which is characteristic of fiduciary management (FM) arrangements.

Unlike fiduciary management, OCIO has no statutory definition and benefits from less prescriptive monitoring requirements under regulation and, importantly, may not require trustees to go through tender processes.

Outsourced chief investment officer

The OCIO model is one where the pension scheme hires a professional third-party entity to carry out the scheme's investment function. Broadly, the OCIO is responsible for the day-to-day management of the investment portfolio (including asset allocation and risk management) whilst the trustee, potentially with the assistance of a third-party investment adviser, remains responsible for setting the overall investment strategy.

Fiduciary management

Unlike OCIO arrangements, what it means to provide fiduciary management services and, consequently, be a fiduciary manager is clearly set out expressly in The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (the Regulation)[1]. In common with OCIO, FM also involves the trustee delegating responsibility for managing some or all of a pension scheme's assets. However, in this approach, the trustee transfers more control and decision-making power to the manager. A fiduciary manager is responsible for investment strategy, strategic asset allocation, manager selection, and monitoring performance and risk. In contrast, the trustee is only required to make high-level, strategic decisions, allowing them to focus on the ultimate outcome desired rather than the particulars of the strategy for getting there).

The most significant difference between the OCIO and FM models therefore lies in the extent to which the investment manager is afforded discretion in respect of the overall investment strategy of the scheme. The level of this discretion of course varies between investment management arrangements though and, in the absence of a clear statutory definition of what constitutes an OCIO arrangement, it is hard to delineate clearly.

Regulatory treatment

In 2018, the Competition and Markets Authority (CMA) expressed several concerns around the FM industry[2] including:

• a lack of engagement by pension trustees when establishing FM arrangements;
• investment consultants steering clients towards their own or affiliated FM services;
• the costs of changing fiduciary manager; and
• the difficulty of accessing information around fees and historic performance.

In response, a mandatory tendering requirement was included in the regulations. This requires trustees to go through a tender process before appointing a fiduciary manager or increasing the amount of assets managed by a fiduciary manager beyond a certain threshold.

The original order issued by the CMA also called for strengthened regulations applying to FMs around conflicts of interest, performance reporting and fee transparency. Fiduciary managers must now provide clearer information on fees and performance to prospective clients and existing clients, offering them a chance to compare and evaluate providers easily. Further, the introduction of new guidance on FM by The Pensions Regulator (TPR) emphasises the need for trustees to appoint a third-party evaluator to assess the fiduciary manager's performance[3].

Interestingly, despite the fact that the same market dynamics which caused the CMA concern in the context of FM arrangements also apply to OCIO arrangements and the obvious similarities between the two models, no equivalent or similar regime applies to OCIO arrangements if they fall outside of the statutory definition of FM. There also seems to have been little to no consideration by the CMA as to whether OCIO arrangements should be subject to a similar regime to FMs and no rationale offered as to why they should not.

This is not to say that OCIO arrangements are unregulated. OCIO providers must be authorised and regulated by the Financial Conduct Authority whilst TPR exercises supervisory authority and provides guidance to trustees on monitoring and reviewing their investments. The reduced level of delegation involved in OCIO arrangements should also result in greater trustee engagement and the presence of an investment consultant advising the trustee also contributes a helpful extra set of eyes when supervising and reviewing the OCIO's performance.

However, the questions remain. Is placing greater reliance on trustee's due diligence processes appropriate in an OCIO context? Should the CMA's focus on promoting procedural fairness in manager selection and enhancing transparency in fees, investment performance and risk reporting be extended to OCIO arrangements?

These questions become increasingly pertinent as OCIO arrangements become more prevalent amongst larger pension schemes and significant delegations of decision-making power become more commonplace. Whilst managers will doubtless welcome the increased flexibility and autonomy offered by OCIO, trustees considering implementing OCIO arrangements would be well advised to bear in mind the concerns that the CMA has expressed in connection with FM arrangements when considering and implementing an OCIO arrangement.

Jonathan Gilmour is a partner, Nicholas Baines a senior associate and Tom Purkiss an associate at Travers Smith