Fiduciary management is big business in Europe, mainly the Netherlands, but has been slow to catch on in the UK as trustees remain wary of handing over day-to-day investment management responsibilities.

Spence Johnson, a market intelligence provider, says there are 29 firms offering fiduciary management services across Europe, managing £761bn (£661bn) on behalf of 517 clients.

89% of these assets are held in the Netherlands (where tighter funding regulation has driven pension schemes’ greater usage), compared
to only 6% in the UK (£39.7bn/ £45.66bn).

The slower uptake of fiduciary management in the UK has been attributed to a fear of losing control of the investment management function, concern as to how fiduciary managers can be measured against more traditional approaches, and confusion over the many different types of services on offer.

The latter stems from the fact that there are four different types of provider in the UK: consultants, traditional asset managers, multi managers and specialist firms which do fiduciary management in some form or another.
Consultants sometimes have their own multi manager (Mercer, Aon Hewitt), others recommend third party fund managers, while a third category of consultant aims to combine both these approaches.

Traditional asset managers active in the fiduciary management market include BlackRock and Schroders, while multi managers in the space include SEI and Russell.

The fourth category are specialist firms which concentrate (sometimes exclusively) on fiduciary management. These firms have varying heritages, such as having been a trading firm, a firm of consultants (Cardano) or a pension scheme turned fiduciary manager (Mn Services).

Mark Hodgkinson, a director at Muse Advisory, a firm which advises trustee boards, believes that some traditional asset managers have entered the market looking for a wider role, to have greater control over their clients and possibly to edge out consultants who act as gatekeepers.

Phil Page, client manager at Cardano, says: "There is a spectrum of asset managers. Some are managing the assets rather than the liabilities, while others are managing certain asset classes and have a separate team doing liability driven investment . Then there are the consultants who have knowledge of the assets and the liabilities. Cardano is somewhere in the middle as we have experience of both."

Colin English, head of business development at Mn Services, says: "We believe that true fiduciary management is acting as an in-house investment department that has been outsourced. Any one of our clients shares in our resource of 220 investment professionals, providing fiduciary management oversight of the portfolio and implementation of the required investment strategy."

So what are the differences between the services provided by consultants and asset managers?

Consultants have a good knowledge of their clients' assets and liabilities and skills in giving advice across the piece on risk and liability management. But Muse’s Hodkinson says: "They may not always have great implementation or manager selection skill and they may have no asset management or trading background other than the people they can buy in."

Multi managers, by contrast, tend to concentrate on governance, speed of decision making, implementation, how to manage the assets better and generate higher returns.

But Cardano's Page says: "The different offerings largely fitted in with the background of the provider, but in the last year there's been a convergence on focusing on assets versus liabilities. Some consultants are teaming up with asset managers, such as Aon Hewitt teaming up
with Schroders.

"Eventually, the asset managers realised they had to address the liabilities and to focus on improving the coverage of the pensions that the scheme has to pay. Now we are seeing this from most of the participants in the market. Now the message is: 'We will help your assets to outperform your liabilities and manage your funding level.'"

Hodgkinson agrees: "One clear service that most will claim to offer is an end game management approach whereby a specific defined funding target – defined in terms of timeframe, risk budget and liability definition – is set and it is the manager's objective to achieve that target in a risk controlled manner. These services range from a relatively mechanistic trigger-based approach, to a more flexible approach with adviser/client intervention throughout the journey."

Most fiduciary managers also claim to offer a spectrum of delegation, whereby clients can choose where the provider's implementation respon-sibilities begin and end.

For instance, some providers may have certain requirements before they will take on a mandate, such as the client being required to use their own multi-manager funds.

Other differentiators include the legal/contractual relationship with asset managers, and the extent to which a provider will include tactical asset allocation as part of its service.

To date, UK pension schemes have maintained a cautious stance towards fiduciary management. Providers say that while the degree of awareness of the service has risen considerably since 2000, there remains a common perception among trustees that fiduciary management involves abdicating control and decision making to a third party.

Mn Services’ English says: "Nothing could be further from the truth. Fiduciary management enables trustees to spend more time on strategic issues. Although only 5% of the UK market has adopted it to
date, the feedback I get at trustee conferences is that around 30% of schemes will be actively exploring whether their trustee board should use it in 2011."

English adds that 89% of defined benefit schemes in the Netherlands have adopted fiduciary management over the last decade, largely due to stricter regulation of funding levels by the Dutch Pensions Regulator than in the UK and the existence of more industrywide funds.

BlackRock thinks that fiduciary mandates will become increasingly adopted in the UK as pension schemes aim for greater control and visibility over likely investment outcomes and that this will remain a key goal in 2011 and beyond, as schemes are generally less able, or willing, to tolerate significant market volatility.

Michael Marks, managing director, and chief operating officer of BlackRock's Fiduciary Mandate Investment team says: "One way to achieve this is to ensure that assets are allocated in a more dynamic and timely manner using a fiduciary management approach.

“Consequently, BlackRock believes that over the next few years, a growing number of schemes will either reinforce their internal capabilities or, where this is not possible, adopt a form of fiduciary management."
Despite the positive outlook, confusion over the different types of offering still reigns.

Mercer sees the confusion arising out of trustees fearing the loss of control. Dan Melley, Mercer partner and head of dynamic de-risking solutions, says that as long as it is clear what is being delegated and what is not, fiduciary management can be "as much or as little as you want”.

Aon partner and chief executive officer of delegated consultancy service, Zuhair Muhammed, believes that trustees are suspicious of consultants trying to sell products and that there is a perception that fiduciary management is just a packaged solution, where the provider is using their own manager of managers arm.

BlackRock agrees that while fiduciary management is increasingly becoming the accepted term, there is still some confusion as a result of providers using different terminology, such as integrated balance sheet management, delegated consulting, implemented consulting, solvency management, integrated solutions, total integrated governance solutions and delegated CIO.

This highlights the need for the industry to settle on a single name
for the service and ongoing education as to what fiduciary management entails exactly, so that trustees can make informed decisions when appointing providers.

Pam Atherton is a freelance journalist

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