In his book Fiduciary Management author Anton van Nunen subtitles it Blueprint for Pension Fund Excellence. The pioneer of fiduciary management states that this strategy is “an answer to the increasing complexity of the investment environment in which trustees of pension funds and endowments have to fulfil their roles”.
Fiduciary management is a broad concept that usually involves the delegation of some investment decisions, previously taken by trustees, to a provider. It is essentially ‘outside help’, brought in to create a better governance structure and to achieve a better return or improve the funding level in a more efficient manner.
According to KPMG’s latest Fiduciary Management Survey, as of 30 June 2013, the size of the overall UK fiduciary management (FM) market now stands at approximately £58 billion with around 345 UK pension scheme mandates. FM can be a full delegation service, managing 100 per cent of scheme assets, or partial delegation, whereby just a designated portion of the assets or responsibilities are looked after.
FM is still relatively new to the UK pensions market and as it continues its growth phase – mainly for small to medium sized schemes – it is imperative to establish the right relationships between the fiduciary manager and the trustee. The best results of FM occur when both parties understand the objectives and work at achieving them together.
Cardano UK CEO Kerrin Rosenberg says one can think of fiduciary management as “wrapping up” what one might otherwise employ an investment adviser, an LDI manager and a fund-of-fund manager to do - but with a single objective of “outperforming the liabilities”. His firm focuses on ‘full’ fiduciary management, key benefits being better governance, faster decision making and a more diversified set of investments. This, he argues, leads to “better risk-adjusted returns”.
He believes that in a fiduciary management arrangement the trustees should be seen as non-executive directors. Their key roles, he says, are as follows:-
■ To define the objectives of the fiduciary management mandates – these are mainly around the risk and return objectives and how the performance will be measured and incentivised.
■ To define the scope given to the fiduciary manager – what asset classes are permitted and in what size?
■ To appoint and monitor the fiduciary manager – this requires an understanding of the fiduciary manager’s capabilities and processes, and regular communication/reporting from the manager.
He adds that if trustees feel they need support in executing the above it would be appropriate for them to appoint an adviser, but it is important to ensure that the person is not conflicted and acts with independence. Additionally, the fiduciary manager’s role should be clearly laid out in their contract.
“The most important ingredient for a successful relationship between the fiduciary manager and the trustee is trust,” observes Aon Hewitt partner and head of client solutions Sion Cole. “We are both looking to solve the same problem. Understanding the partnership at the outset is a key objective.”
Tangible objectives within a partnership would include defining the benchmark, the return objectives, the risk tolerance and the period of time that performance is being measured. Less tangible objectives would include setting expectations of the types of ideas that are brought into the portfolio.
Trustees retain all of the key strategic decisions and the setting of the investment objective and parameters that the fiduciary manager must work within. This may include preferences on asset classes – such as stipulating they do not want to invest in property or infrastructure for liquidity reasons. Amongst their duties fiduciary managers would typically be responsible for ensuring the portfolio remains fresh and that trustees are educated. They would typically also seek to appoint the best in class managers to manage different segments of the portfolio and thereafter manage the relationship between themselves and the investment managers they have appointed.
“Once you have the understanding in place about who does what it is very much about trustees and the fiduciary manager working side by side,” notes Cole.
Mercer head of FM UK Dan Melley agrees. “A successful relationship relies on openness and collaboration on both sides,” he offers. “While trustees are delegating, they are not abdicating responsibilities. Trustees need to be involved.”
This often involves monthly investment sub-committee meetings to discuss complex issues such as changes in funding levels and/or the hedging position of assets.
Where the role of the fiduciary manager can go wrong is if it is not clear who owns what decision. “Where relationships have been tested is where there was an assumption on one side or the other over responsibility,” says Melley. “For example if the trustee assumed they gave a manager full discretion on interest rate hedging, whereas the fiduciary manager understood differently, a market opportunity could be missed.”
Transparency is also very important, he adds. If anything is delegated to the fiduciary manager the trustee not only needs to see what is being done but needs to understand the justification for changes.
In the FM survey KPMG notes that a minority of providers still have to make “significant strides” in providing scrutiny and openness. “There continues to be some resistance to full openness and independent oversight within segments of the FM market, with not all providers offering full transparency,” says its head of fiduciary research Calum Brunton-Smith. “This is inconsistent with what is expected of asset managers.” Furthermore, he believes that as the UK FM market becomes increasingly competitive, clients will demand providers offer full transparency, particularly of performance data.
Finding the most suitable manager
As fiduciary management is an umbrella term that encapsulates a wide range of solutions, trustees need to know what they want the manager to do and then check the manager is actually equipped to do it. Cole points out that it is “crucial” for trustees to get to know their fiduciary managers well before they appoint them, namely by putting in the effort upfront to do proper due diligence. Not doing this is the biggest pitfall.
The trustee should make a shortlist of those capable of meeting their objectives. They should definitely not be employed on the basis of a standard “response and proposal” questionnaire and one hour beauty parade, urges Cole.
“Once you have determined two or three managers you must work out what relationship works best. Arrange a site visit so you can get to know the provider properly. Meet the entire team – including middle office, back office, CIO and risk manager. Make sure they have the resources, systems and processes to successfully implement what you want them to do. That will also help define the mandate so there is no ambiguity. It is not a case of finding the best manager but the most ‘suitable’ one for the needs of the trustee.”
In its FM survey KPMG notes that the governance around fiduciary manager appointments and the ongoing oversight of fiduciary managers is improving. Head of research Alex Koriath found that it is becoming more common for pension funds to go through a comprehensive tender exercise before an appointment, often overseen by a specialist advisor. There is also more ‘independent oversight’ coming into the ongoing monitoring of a fiduciary manager’s risk, performance and compliance with investment guidelines and less reliance on self-reporting from the fiduciary manager. “We think all of these are positive developments that will help the market to evolve and mature,” he says.
The study also observes that within the UK FM market to date market share has been dominated by providers “with very strong trustee relationships and those that can clearly demonstrate their ability in developing strategy”. So long as these relationships continue to thrive so too will the UK FM market, with more delegated mandates being awarded.
Nadine Wojakovski is a freelance journalist