By William Parry
Fiduciary management appointments continue to play an important role for trustees.
Access to a team that is dedicated to the day-to-day running of the pension scheme’s assets is an attractive solution. This is particularly relevant for trustees who find it difficult to make and implement decisions within their own governance structure.
That said, delegating all responsibility away is not the solution. Speed of implementation and ability to react to market developments is far greater with a fiduciary manager. However, trustees retain the responsibility, on behalf of their members, to manage and monitor the ongoing progression of the pension scheme’s strategy.
In a recent client survey, we have found that while many clients are happy with the services provided by their fiduciary manager, only 3 in every 10 clients monitor their fiduciary manager using a third party provider. This can have serious repercussions – it implies that most trustees who have delegated responsibility across to fiduciary managers only hear the story of how well they are doing from one (potentially conflicted!) source.
When we delved deeper into the numbers, we found that less than a third of clients review their fiduciary manager on an annual basis, with 35% of clients having no formal review process in place at all.
We also looked at how many fiduciary managers were selected via competitive tender process, ie involving two or more providers. Although open tenders are becoming increasingly common, at least one-third of current arrangements were not selected through an open tender process. This implies that all of these appointments were made off the back of existing relationships and direct recommendations. This, combined with the lack of monitoring, throws into sharp contrast how trustees whose needs may have changed, might be continuing with unsuitable arrangements.
Following the results of our survey, we believe it is imperative that an independent voice is brought into the process. This can be both at outset as well as ongoing monitoring of the arrangement. This is the only way that trustees can be sure that they are fulfilling their obligations and not falling into the “set and forget” trap.
As well as the onus on trustees to ensure that the arrangement is suitable, both at outset and on an ongoing basis, a more informed voice in the room may help with fee negotiations. Fiduciary arrangements, as well as having considerable complexity, often have complex charges which can be very opaque in nature.
It is important to consider these suggestions in light of the overall costs of the running of a pension scheme. Ultimately, another layer of governance is going to increase the costs paid by the trustees. To that extent, the trustees have to be comfortable that they are getting value for money. Monitoring costs are usually much lower than those charged to run the pension scheme’s assets. This additional sum may well provide the independent voice that allows trustees to ensure their assets are managed accordingly. It is worth considering additional costs in terms of the potential overall impact on the funding level.
Fiduciary managers have come a long way in recent years, with a wide and diverse range of offerings available to those trustees who believe it would be a suitable arrangement for them. We would support this and highlight that pension schemes come in all shapes and sizes. For many trustees – in particular those who struggle to make and implement decisions under their current governance structures – handing responsibility across to a fiduciary manager will be appropriate. Trustees, with independent advice, should then monitor their progress properly against their long term investment strategy.
William Parry is an investment consultant at Buck Consultants at Xerox
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