A perfect fit

Karen Gomm looks at what schemes should consider when trying to find a fiduciary manager that’s right for them

An increasingly complex and diverse array of investment opportunities, coupled with the pressure to focus on reducing risks while maintaining funding levels, has for many schemes highlighted the need for a complete investment governance overhaul.

However, this often requires a level of expertise above that of most lay trustees in order to manage the funds in the most efficient way, which is why some are now turning to a fiduciary manager to fill the knowledge gaps, says MN business development director UK Marcelo Dellavedova.

“In order to get full funding, trustees have to put in place more sophisticated investment strategies. However, to execute these strategies in a holistic and dynamic way - for instance by reducing risk when the funding ratio rises more quickly than expected - without incurring unrewarded risks and excessive costs requires resources and expertise,” he says.

This is exactly what fiduciary management can offer to a pension scheme and a growing number are beginning to see the benefits, according to the National Association of Pension Funds (NAPF), which recently reported that use of fiduciary management has increased by 30 per cent since 2010, with more than 200 pension schemes in the UK using it.

Alliance Bernstein managing director, Pension Strategies Group, Tim Banks says: “The recent growth is recognition that the investment strategy must be proactively managed against the scheme’s specific benchmark as referenced against liabilities. In this regard the typical trustee decision making cycle is incompatible with the necessary dynamic management of the strategy.”

Trying to navigate an increasingly complex investment landscape could also propel some schemes towards fiduciary management, says Cardano head of clients Richard Dowell. “There are a number of different reasons why fiduciary management continues to grow. Pension fund management continues to get more complex and the change in economic conditions and future outlook means that the traditional approach to investment, which has tended not to work in the past, is unlikely to succeed in the future.”

Fiduciary management differs from traditional pensions consultants in that the provider not only works in alignment with the objectives of the scheme but also takes on all or some of the investments of the pension scheme from the trustees, including when and where to invest.

“The impact of fiduciary management is leading schemes to achieving their funding goals quicker, for less cost and with less risk than would otherwise be possible. This has in turn provided increased security for members and greater certainty for sponsoring employers as contributions will become more steady and predictable over time,” says Aon Hewitt partner and UK head of client solutions Sion Cole.

However, to work well, trustees must view the appointment of a fiduciary manager as a partnership and not simply as a takeover of investments, says BNP Paribas Investment Partners head LDI and fiduciary management Anton Wouters. “Fiduciary management is thus not intended to take over all responsibilities from the pension fund, but to support the effective and efficient design and implementation of the policy set by the board. The board retains full control.”

Despite its appeal, appointing a fiduciary manager is not a quick fix solution, but rather a long-term partnership and requires careful consideration from trustees. In the first instance the pension scheme should be clear on its investment objectives, before jumping into a fiduciary partnership says Muse Advisory associate director Anne Kershaw.

“Having established clear and quantifiable objectives, they need to step back and assess whether they have the capability and capacity (including any internal investment expertise and the existing advisory set up) to effectively and efficiently manage the assets to give them the best possible chance of achieving those objectives,” she says.

With more firms offering their services it can be difficult for a pension scheme to decide upon the right provider for them. This is why it is important for trustees to work closely with fiduciary managers from the selection stage onwards to ensure the best match, says Cole.

”The very best processes we have been involved in for appointing a fiduciary manager were not simply a request for proposal followed by a one-hour beauty parade. Instead, all short-listed providers were given access to the trustees (or a subset of the trustees) at the outset so we could then design a proposal before presenting it to the full trustee board for scrutiny,” he says.

Once trustees are at this short-list stage there are some key points they may wish to consider, which can be boiled down to three main areas, says Dellavedova. The first of which is the scale fiduciary managers can wield by providing access to products and managers across a range of assets. “This enables providers to offer a solution with higher risk-adjusted returns after fees because of economies of scale and purchasing power,” he says.

Trustees should also make sure the objectives of the scheme are in alignment with the fiduciary manager’s objectives to avoid any potential conflicts of interest, says Dellavedova.

Lastly, trustees should look for an experienced provider with a good track record of delivering results, “not just in terms of investment performance, but in terms of quality of advice and reporting,” he says.

Finding a provider that fits culturally with the scheme can also be just as important as performance, says Wouters. “Fiduciary management is a tailor-made concept that can be/is different for every client and managers should be flexible in their approach. Often the cultural fit is equally important as the pure investment capabilities. But of course, a full range of investment capabilities, a broad service concept (client servicing and reporting) and expertise in managing fiduciary portfolios are essential,” he says.

In addition, trustees should not forget the various legal implications of any investment management agreement they may undertake, including requirements of the Pensions Act 1995, says Charles Russell LLP senior associate Victoria Mance.

“Any discretion of trustees to make a decision about investments may only be delegated by or on behalf of the trustees to a fund manager who has the appropriate FSMA authorisations or to a sub-committee of two or more trustees. Trustees should check that any fiduciary management product would not cause the trustees to breach these requirements and should obtain legal advice for this reason,” says Mance.

This is why, from a legal perspective, trustees need to ensure they have a thorough understanding of the services they are buying into says Stephenson Harwood pensions partner Fraser Sparks.

“Different providers offer different products under the ‘fiduciary management’ or ‘discretionary management’ banner and those products can be very different. Those variations can be very important as they often relate to the extent of the fiduciary manager’s powers to choose investment managers and to decide asset allocation,” he says.

Once these issues have been ironed out, the board needs to be clear on how the fiduciary manager will be monitored, says Sparks. “The potential issue here is that the trustees’ investment consultants, who would usually undertake the monitoring of investment managers, could well be linked to the fiduciary manager (they will probably be within the same corporate group).”

If this is the case, trustees will need to address any potential conflict issues with the consultants and the possibility of obtaining independent monitoring of the fiduciary manager, he says.

Written by Karen Gomm, a freelance journalist

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