Is the fiduciary manager/OCIO’s business model still viable?
Series Title: Is your pension team fit for the DB endgame?
Part 3: Is the fiduciary manager/OCIO’s business model still viable?
Summary:
In the UK, the fiduciary manager/OCIO model is under pressure. Too many players are chasing business at threadbare prices, asset values have fallen, and with buy-out in sight, business has suddenly halved in its expected term.
This surely brings huge pressure on profitability. Trustees considering, or already using fiduciary management (or OCIO) may need to re-think the outsourcing arrangements and the incentive structures with their manager.
Avida can help support schemes through this transition by advising on appropriate resourcing models, operational circuits and governance structures. Avida can also provide expert project and temporary headcount support.
The pressure on the fiduciary and OCIO market
In twelve months, the fiduciary (or OCIO) model is facing a headwind of commercial pressure. An existing driver on pricing and service was the CMA investigation. The new drivers are higher yields, which have reduced AuM, and better funding, which brings funds closer to buy-out.
Three years ago, the CMA investigation asked trustees to 'mark' their fiduciary managers on a tougher basis. Avida's proprietary research showed that regular tendering pressed costs down and services up. Fiduciary managers are commercial entities. Their profit streams (and therefore sustainability) depend on fees, mostly bps per AuM, and the expected term of a reliable stream of income. Rising bond yields have probably cut AuM by a quarter (maybe more), and the target market by the same. Industry funding levels have risen markedly, with the amount of assets required to meet buy-out now in sight.
For a fiduciary manager, or OCIO, that's not great news. A fifteen-year business may have shrunk by half in the expected term.
How big is the market?
Our database shows that the current market is about 700 schemes, for £200bn, across 15 providers. Anecdotally (and this is very difficult to predict), that market may double in size, and we have heard of other ‘players’ setting up to enter. But at the same time surely some of these assets will now head to the insurance market, earlier than thought.
This just feels like too many players chasing too little business.
Consequences for your scheme
Whether with a fiduciary manager/OCIO, or considering the same, the most fundamental consideration is what your ultimate objective is, and where your scheme stands against this. We suspect this is relatively straightforward to track, as actuarial funding calculations are updated and so on.
The next bit is harder - which is how you get from where you are to your ultimate objective.
If considering a fiduciary manager (or OCIO):
Ask:
How is your business impacted by these broader pressures?
What's my exit route, if I need one?
How would you manage the conflict between retaining assets and enabling a buyin/out?
If with a fiduciary manager (or OCIO) already... Add the following to the list:
Our financial position has changed a lot, how do you propose to manage this?
Please lay out proposals to rebalance
If selling illiquid assets, how will that process be managed (governance/sell discipline/conflicts)?
How long will this process likely take, consistent with aspiration?
If you were considering a fiduciary manager, you may also wish to ponder whether it's actually worth engaging a manager to sell down assets, rebalance, then hold a mainly gilt and credit portfolio. This needs much simpler governance - the more complex decision is really getting the scheme ready for buying out and managing this process. Which is a wider question than investments, and which, once rebalanced, should be much less intensive, and should also be able to be run cheaply.
Avida can help by:
Assessing the suitability of fiduciary manager given your circumstances;
Assessing and benchmarking your existing fiduciary manager;
Enabling challenge and monitoring, such that interests are aligned.
