Fiduciary management: Uncharted territory

by

16 Dec 2015

Industry reports point to a steady increase in fiduciary management among pension schemes of all sizes. But, as Pádraig Floyd discovers, this growth continues alongside low rates of mandate monitoring.

Features

Web Share

Industry reports point to a steady increase in fiduciary management among pension schemes of all sizes. But, as Pádraig Floyd discovers, this growth continues alongside low rates of mandate monitoring.

NO CONSENSUS

The position on open tendering in the KPMG report regularly splits opinion. Many – including the large consultant firms offering fiduciary – say they see it in increasing numbers and claim those who say it is not open are naysayers because they haven’t been invited to the party.

But many small schemes don’t generally want to go through the hassle of a tender, says John Finch, divisional director, investment consulting at JLT Benefit Solutions and readily admits that many clients have come from this route.

“Bigger funds are more likely to do full due diligence,” says Finch. “But when there is an independent trustee involved that is where we tend to see more open processes and so we may see more formal tenders in the future.”

The Aon survey shows almost three quarters (74%) of schemes do in fact use beauty parades and/or site visits to select a fiduciary manager. Despite a lack of consistent approach to tendering – if not tendering itself – the Aon study shows a very high satisfaction rate with fiduciary management.

It showed that 98% of schemes characterised their overall experience as ‘excellent, good or satisfactory’. There will be those who will consider this a rather broad metric and of course they would say that, but if the manager performs to the benchmarks provided, it is hard to argue they are doing a bad job.

HARD DATA

There is a lack of independent assessment, despite the number of firms purporting to offer such a service. It is widely accepted by all parties – even those who reject fiduciary management – that if a client has a performance indicator modelled to their specific characteristics, it is very difficult to build an index to examine relative performance.

There are moves to develop some data to show the relative performance of fiduciary managers, with specialist consultancy IC Select said to be on the cusp of achieving a breakthrough in this area.

There are some managers who publish their own data, too, and while this means there is more ‘proof’ in the market, it would certainly help if it was easy for schemes to examine the data, says Richard Dowell, head of clients at Cardano.

“If the manager improves the funding ratio, you need assets to beat liabilities, so they should be able to publish aggregate figures of performance on assets against performance on liabilities,” says Dowell.

“This needs to be the clients’ actual experience, to include transaction costs and allow for slight differences as simulation might not get you there.”

William Parry, investment consultant and head of fiduciary management evaluation service at Buck Consultants, says funding level is one the best metrics if a fiduciary manager is hitting the marks, but even such a benchmark could be misleading.

“The difficulty comes from where the scheme is now,” says Parry. “An improvement from 60% to 64% is far easier to achieve than from 90% to 94%, yet it is still only a 4% improvement.”

De-risking and contribution elements can also influence this assessment, he says. Giles Payne, a director at HR Trustees, is convinced more could be done in this area to give schemes a better idea of how fiduciary managers are meeting clients’ requirements.

It is important to separate how they run the money effectively from how they structure the hedges, says Payne, as they will have different policies on hedges.

“Lots of managers are running pooled approaches and for the growth elements, they should be able to state how they have done against a benchmark of cash plus four or five and declare their volatility,” he says.

“Growth should not be the problem it is claimed to be and I think they’re hiding behind the hedging element which could be very different.”

A NEW MARKET

The increased use of pooled funds by fiduciary managers has been one of the catalysts for the growth at the smaller end of the market and may be a route to building a fiduciary management solution for the broader market.

“You can see a DC fund as a tiny DB scheme with many of the same challenges,” says KPMG’s Webb, “but the challenge is how to build something for the individual member – you can’t lump them all together as it requires something more comprehensive than just an investment solution.”

Comments

More Articles

Subscribe

Subscribe to Our Newsletter and Magazine

Sign up to the portfolio institutional newsletter to receive a weekly update with our latest features, interviews, ESG content, opinion, roundtables and event invites. Institutional investors also qualify for a free-of-charge magazine subscription.

×

We use cookies to improve your experience on this website. For more information, please see our Privacy Policy.