Fiduciary management: Uncharted territory

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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.

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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.

But for Barbara Saunders, managing director, investment solutions, at P-Solve – which runs fiduciary mandates for DC clients – the most important thing in terms of DC is to invest in vehicles that are designed for DC and not just repackaged DB ones.

“They require different tools,” says Saunders. “DC schemes need an inflation-plus return, because when DB uses cash-plus, it is usually because the inflation is hedged.”

In order to achieve this, the robustness of default strategies will need to improve, she says, and that includes those being used in DC. Saunders is bullish about the value fiduciary offers to schemes, including in the DC arena.

“Fiduciary is not much more expensive when compared to diversified growth funds (DGFs),” says Saunders. “If you are doing the consulting and management, the net cost should be cheaper, but there remain some questions about governance that need to be addressed.”

SOFTLY, SOFTLY

Whatever is suggested by the various reports on the fiduciary management market, it is clear that the market is continuing to grow and that governance is exercising trustees.

There is growth in the larger schemes using fiduciary to address governance blindspots, or to more tactically access asset classes they haven’t the budget to cover.

The smaller end is also looking to benefit from the experience the larger schemes have given to their providers.

“Schemes using a simplified approach – such as DGF and LDI (liability driven investment) – are looking to us to come up with more to offer the same or similar levels of sophistication as we would offer large clients,” says Kempen’s Jesudasan. “This is an area where there is a lot of demand.”

NOT FOR EVERYONE

However, not everyone is heading towards fiduciary, says Patrick O’Sullivan, a director of investment consulting at Redington, a confirmed sceptic on the merit of fiduciary management above traditional consultingmodels.

Though he accepts the direction of travel, he believes most of the adopters to date represent low hanging fruit for consultants with long-standing relationships.

“When it comes to costs,” says O’Sullivan, “we are seeing schemes coming up to review looking at another traditional manager or adviser for a developed proposition to take away a layer of fees.”

“An interesting development, which is also encouraging, is that we are seeing schemes with fiduciary managers who are reviewing them, but not just against other fiduciary managers, but other advisory companies and approaches,” adds O’Sullivan.

Ultimately it will be judged on its own merits and if it can be demonstrated it is adding value, we may anticipate similar growth over the coming year.

Until fiduciary management can show – unequivocally – it is achieving those results by design rather than luck, growth may be restricted in a regulatory environment that expects trustees to be seen to be doing the right thing.

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