Positive growth for fiduciary management space despite fall in AUM

The fiduciary management (FM) market has seen positive growth over the past year, although growth has remained below pre-Covid levels, research from Isio has revealed, prompting concerns that there may be further challenges ahead.

Isio’s annual survey, Latest trends in Fiduciary Management, showed that despite facing a multitude of challenges over the past year, FM rebounded in 2022, with the total number of mandates growing 7 per cent versus 2021.

However, Isio suggested that growth may have peaked as the growth rate remains below pre-2020 levels, while the industry’s total assets under management (AUM) fell for the first time since pre-2008.

Indeed, the report revealed the impact of the recent challenging market conditions for fiduciary managers, revealing that the total AUM decreased 5 per cent to £218bn in 2022, largely as result of a rise in yields driving declines in gilts and liability-driven investment (LDI) portfolios.

According to the research, the impact of market conditions on AUM was significant enough to outweigh the rise in assets from pension schemes that were new to fiduciary management over the year.

It also pointed out that the fall in AUM would have been much greater without the entry of a few large schemes through OCIO solutions with fiduciary providers.

However, despite the challenges of the past year, the report revealed that pension schemes are moving rapidly along their journeys towards buyout and self-sufficiency, buoyed by the strong performance of growth assets in the post March 2020 environment and the more recent decrease in buy-out liabilities as yields have risen.

Connected to this, Isio found higher liability hedging targets across all fiduciary managers up to June 2022, with the proportion of schemes more than 80 per cent hedged rising from 68.6 per cent in 2019 to 94.1 per cent in 2022.

In parallel, FMs have decreased return targets for schemes, with the proportion targeting 2.51 per cent-3.5 per cent above liabilities falling from 28.6 per cent in 2019 to 21 per cent in 2022.

Additionally, those with targets of 0.51 per cent to 1.5 per cent above liabilities rose from 24.2 per cent in 2019 to 34.4 cent in 2022

More broadly, the report revealed that while the number of £1bn+ pension schemes using FMs has increased, the percentage of the market they represent stayed level.

In contrast, there was a more significant increase in the number of smaller schemes using FMs, with those with less than £100m in assets now representing 62 per cent of all mandates by number, versus 54 per cent in 2021.

Isio head of fiduciary oversight, Paula Champion, commented: “This year’s market volatility and challenging macroeconomic environment have tested fiduciary managers, shrinking total AUM despite a healthy increase in mandates among the largest and smallest schemes.

“While it’s great to see schemes are further along their journeys to buyout and self-sufficiency, and the impacts of the CMA’s review are now bedded in, there are significant hurdles ahead for the FM industry.

"First and foremost is the decision on whether to continue increasing hedging levels following the LDI crisis, as well as a broader revaluation of the role that LDI, which had been increasingly significant to portfolios, should play from here.

“Longer-term, FMs will have to adapt to both the increasing impact of regulation, in particular around environmental, social and governance (ESG), as well as the changing face of the industry as defined benefit (DB) schemes mature. Currently Task Force for Climate-Related Financial Disclosures (TCFD) reporting requirements only apply to schemes with assets exceeding £1bn, but we expect this to be extended to all schemes in the foreseeable future.

“And while defined contribution (DC) only accounts for 11.4 per cent of FM mandates versus 88.6 per cent of mandates which are DB schemes, the balance will shift in the future with significant implications for the FM market.”

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