By Sophia Grene, Financial Times, October 19, 2015
After a number of false starts, fiduciary management, where the day-to-day management of a pension scheme is outsourced, seems to be taking off in the UK market.
“My best guess is that, in five years, more than half of defined benefit [pension] assets will be run under some form of fiduciary management,” says Chris Ford, global head of investment at Towers Watson, the consultancy.
“It is going to be a much bigger deal than people think; and it is going to be mostly managed by consultants or those that were previously in the consultant role.”
David Curtis, head of UK institutional business at Goldman Sachs Asset Management agrees with the first half of the prediction, but not the second. He expects investment management skills to edge out consultants’ engagement skills.
“The model is created around the client need, so it is not fundamentally dependent on whether an asset manager or consultant is the fiduciary manager,” he says. “What differs is the skillset the parties bring to the table and, clearly, an asset manager is adept at taking advantage of market opportunities.”
Motorola Solutions, the technology group, recently awarded GSAM a fiduciary mandate to manage its US pension scheme. Then, in an independent process, it awarded it a similar mandate in the UK.
Robert O’Keef, corporate treasurer at Motorola Solutions, oversaw the process of deciding on fiduciary management and seeking out the best candidate to implement it.
“Consultants are very good at putting together a user interface for this very sophisticated process so that lay people can understand it. That resonated at the beginning,” he says. “We were agnostic at the start, but by the end we wanted to lean in to the investment side.”
Motorola decided fiduciary management made sense because its pension liabilities and asset base are significantly larger than the company. Since managing such schemes needs considerable expertise and resources, outsourcing that seemed like a good solution.
For a lot of smaller schemes the same lack of resources is a motivator to move to fiduciary management. However, eyebrows have been raised as they frequently move seamlessly from a consultant relationship to a fiduciary relationship with the same provider, with no competitive tendering process.
Mr Ford says this is reasonable. The cost of weighing the options would wipe out the savings of moving to fiduciary management. He adds that a consultant relationship usually builds up so much trust between the parties that the consultant would most likely win the tender in any case.
Ralph Frank, an independent consultant, is less insouciant about this process. “I would be really sceptical about that [cost-benefit analysis],” he says. “The duties of the trustees are the same, irrespective of the size of the scheme.”
Mr Frank is attempting to shed some light on the somewhat murky landscape by developing performance measurement standards for fiduciary management, but has found it difficult to obtain sufficient data from providers to create a robust methodology.
Simone Lavelle, a partner at Avida, the advisory company that acts as a management consultant for pension schemes, is also dubious about pensions choosing to appoint their erstwhile consultants as fiduciary managers without shopping around. “It means consultants can move from an hourly fee to a basis-points structure [charging based on assets under management], but the jury is out as to whether this provides value for money.”
In Ms Lavelle’s opinion, fiduciary management, or implemented consulting as it is often called, requires more consideration and understanding than this simple transition allows. “It is not choosing a service, it is really more thorough. And it always has governance implications.”
Trustees choosing to go down the implemented consulting route need to understand what tasks they are outsourcing and ensure there is no unnecessary replication, she says.
Those implications are not standardised, as not all fiduciary mandates are the same. In fact, the lack of clarity as to what fiduciary management actually is has been one of the drags on its progress in the UK. It can range from complete outsourcing of everything except the strategic asset allocation decisions to a less comprehensive version where the implementation of the investment strategy is the only part outsourced.
This variation is not necessarily narrowing, but potential clients are becoming more familiar with the concepts, says Mr Curtis. “There has been slow, incremental adoption of fiduciary management over many years. Essentially, as DB schemes continue to mature, the timeframe to ensure that pensions can be paid is shorter.”
So far, the take-up has mostly been at the smaller end of the market, where it is relatively clear that schemes do not have the resources to perform investment management, but Mr Curtis believes the popularity of fiduciary management will slowly move up the scale ladder.