By Sion Cole
Over 350 UK schemes now have fiduciary management – so it is by no means a new approach. However its growth seems to be accompanied by a number of myths and misconceptions which should, rightly, be corrected.
There is no one-size-fits-all solution to the many challenges facing UK pension scheme trustees. At Aon Hewitt we are seeing clients taking three broad routes: get busy, get simple or get out (fiduciary management). Briefly, get busy is where trustees commit time and resources to their scheme, often meeting at the drop of a hat and have a complex investment strategy. Get simple typically means investing in just equities and bonds through one passive manager, meeting once or twice a year and keeping the investment strategy more simple.
While many schemes would like to get busy, not everyone can ‘afford’ to do so due to their size or the expertise and time requirements that this approach demands. On the other end of the spectrum, keeping it simple is easier to access, however it has the compromise of higher expected volatility.
Fiduciary management can be seen as the best of both worlds. It offers the benefits of get busy, such as diversification, close monitoring and focus on funding level improvements, but with the governance framework of keeping it simple. Fiduciary management is a bespoke solution, tailored to the unique needs of each individual pension scheme. The solution takes into account assets and liabilities and focuses on improving funding levels and helping schemes to meet their long-term goals.
So why is there so much debate around fiduciary management? Despite it delivering benefits to many schemes (with 99% of schemes saying they are satisfied or better with fiduciary management, in our annual UK survey) there remains a number of myths around this approach.
Myths: the three Cs
Three of the more commonly discussed myths around fiduciary management are cost, conflict and control. Below I briefly offer some clarity around these.
Cost – as a bespoke solution, the costs and fees involved in fiduciary management really depend upon the exact solution in place. By this we mean elements such as the growth/matching split, the asset allocation, active vs passive management, alternatives use and internally vs externally managed funds. While all of these impact the total cost, it’s important to consider the solution as a whole and what value it offers from a net of fees context.
Conflicts – it is sometimes said that fiduciary management brings additional conflicts of interest. However this is not the case. All professional services are conflicted in some way, including accountants, lawyers, fund managers, investment consultants and fiduciary providers. While fiduciary management may add some conflicts it actually reduces others and therefore does not increase them per se.
Control – does fiduciary management mean a loss of control? I would actually ask what we mean by control. We believe control is the ability to ensure stable funding levels and the greatest chance of meeting your end-goal in all conditions. We would say schemes have actually been out of control (with funding levels swinging significantly) and that fiduciary management actually enables greater control. Trustees set the guidelines and objectives and delegate the day to day management of their portfolio to experts who are responsible for delivering on these, benefitting from ‘always on’ investment expertise.
Fiduciary management can, when designed specifically to schemes’ individual needs, truly add value and help address the challenges faced. Perhaps due to its perceived complexity, there are a number of myths that persist but understanding what fiduciary management is and asking the right questions to delve into this approach is an important way to know if something is fact or actually a myth. Critical to the success of this approach is also finding the right provider and solution that suits your unique scheme.
Sion Cole is partner & head of client solutions within Aon Hewitt’s fiduciary business.
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