Number of schemes using FMs declines for first time in 15 years

The number of pension schemes using fiduciary managers (FM) decreased in 2023, Isio’s annual FM survey has revealed, marking the first decline since the survey began in 2008.

Isio’s Latest Trends in Fiduciary Management report stated that the fiduciary management market continued to be tested in 2023, as the consequences of the gilts crisis were processed by the wider pensions industry.

It noted that the impact of gilt yield rises were prominent in 2022 and 2023, with assets under management falling in both years.

A key challenge identified was in the requirement for FMs to source capital for liability-driven investment (LDI) portfolios to maintain liability hedging targets, with gaining access to liquidity proving “difficult” for some.

Due to the change in the market, FMs evolved their offerings, and smaller clients were able to enter the market amid competitive fees and simpler portfolios.

Isio found that the make-up of portfolios has been evolving, with liquid alternatives and equities rising in desirability over illiquid alternatives and credits that were popular in recent years.

Almost three-quarters of scheme with FMs carried out strategy reviews in 2023, according to the analysis.

When asked how they would invest the assets of a £500m scheme targeting a return of gilts +2 per cent a year, Isio found that the general response was “significantly different” compared to last year.

The main differences were this year they would seek increased liability hedging assets, increased liquidity through a move away from illiquid assets and into liquid alternatives and equities, and substituting credit assets for equities, especially passive equities.

As assets under management fell over the past year, and with rising cost inflation affecting FMs, some have reassessed their fee structures, with 16 per cent using a tiered fee (dependent on asset size) and 4 per cent using performance-linked fee structures.

Isio also found that, for the first time, liabilities +0.5 per cent – 1.5 per cent was the most common return target, with the lower return target indicating that the focus for the fiduciary market was shifting to place more importance on insurance capabilities and endgame planning.

Average hedging level targets fell from 94 per cent in 2022 to 87 per cent in 2023 after years of positive trajectory.

Isio said that with lower leverage demands in LDI mandates, greater capital and more onerous collateral requirements were now needed to maintain hedging levels.

There was also a move towards bespoke arrangements, such as segregated LDI, to increase flexibility and efficiency.

Five per cent of schemes moved from pooled to segregated LDI, a proportion that is expected to rise as FMs change their entire client base to segregated arrangements.

Isio head of fiduciary management oversight, Paula Champion, commented: “This time last year, the gilts crisis was a recent event, and we were asking the question – has growth peaked? While this year’s findings show that it has stalled at least temporarily, the requirements from LDI portfolios during the gilts crisis have put a bigger governance burden on trustees.

“This has brought the governance and operational benefits from fiduciary management into the spotlight. We predict we could continue to see a gradual uptick in new schemes entering the market to reduce this burden.

“The unprecedented events of last year have arguably changed the face of the industry forever, but FMs are identifying new opportunities and have continued adding value to schemes who have grappled with the market conditions and tighter regulatory landscape.

“The move back to equities, in particular passive equities, also emphasises that FMs understand the focus is on delivering return without sacrificing liquidity in 2023.”

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