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Setting objectives for your investment consultant

1 May 2019

Barry Mack is a member of the Society of Pension Professionals’ Administration Committee and a director at Muse Advisory

Following its review of the investment consultant (IC) and fiduciary management (FM) markets, one of the Competition and Markets Authority’s draft remedies includes a duty on trustees to set objectives for their IC.

The Pension Regulator will provide further guidance in due course, but in the meantime trustees may wish to consider their scheme objectives and investment strategy before setting objectives for their IC. Scheme objectives may relate to achieving full funding on a technical provisions basis and a longerterm journey plan, such as self-sufficiency or buyout, with target dates identified for their achievement. Your investment strategy will usually reflect a variety of factors, such as the current funding level, the health of the sponsor, the size of the scheme and the trustees’ beliefs. Only when scheme objectives and investment strategy are clear, will it be possible to set specific objectives for your IC. Key amongst them is likely to be:

– Progress against the agreed scheme objectives plus return and risk outcomes

– The performance of underlying asset classes and individual asset managers

Additional quantitative measures could include savings made with underlying managers and adherence to agreed consulting budgets. Trustees should also take account of a range of qualitative factors when forming an overall view of their IC. Factors could include:

– The quality, timeliness and clarity of advice provided in areas such as:

– Setting strategic objectives

– Liability hedging

– Return seeking asset portfolio construction

– The selection of asset managers

– The quality, timeliness and clarity of performance reporting

– The quality and stability of the IC’s team and organisation, including the pro-activity of the team

There won’t always be a perfect alignment between scheme performance and that of the IC. For example, when advice is not of high quality or where trustees do not act on advice given, or act fast enough. Additional metrics can be developed to account for implementation ‘slippage’, for example what the outcomes would have been if the IC’s recommendations had been accepted in full. Where recommendations are not acted upon or implementation takes too long, some trustee boards review their arrangements to ensure they have the right consultant or need more experience and resources.

In conclusion, where the scheme objectives and investment strategy are up-to-date, a range of objectives can be designed specific to the scheme’s context and the role undertaken by the IC. Careful consideration of the results will then be required to ensure that trustees understand the reasons for the outcomes and how to respond to them.

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