by Rory Murphy
Fiduciary management mandates have typically been attractive options for smaller pension funds, but have been growing in favour with larger funds. It is a philosophy that polarises opinion but the £2.7 billion Merchant Navy Officers Pension Fund (MNOPF) regards fiduciary management as a keystone of its governance model.
It is essential that the trustee boards of pension schemes have strategic goals and take overall responsibility for their delivery. This will include recognition of when to use “in house” resources and when specialist skills are likely to lead to better outcomes. Delegated action does not mean delegated responsibility, and the trustee board should ensure that the right advisers are selected and that frameworks are established to monitor their performance.
The MNOPF is a mature industry-wide DB scheme and its Trustee determines the overall fund strategy, including its robust investment beliefs and clear objectives. This is documented in a “journey plan” created in 2012 and is used to set and review funding progress. The MNOPF remains on track to deliver the journey plan objective of 103% funding on a gilts basis by 2025.
Establishing the investment strategy is the responsibility of the full MNOPF Trustee Board and a management sub-committee makes recommendations to the Board in respect of the journey plan, investment strategy and risk management.
The Fund implemented a fiduciary management model (which it refers to as a Delegated Chief Investment Officer (DCIO)) when it appointed Willis Towers Watson to the role in 2011 after a long-standing relationship between the two parties.
Investment strategy, roles and responsibilities
The role of the fiduciary manager should be clearly defined and this is essential for the success of the mandate. The Trustee and the fiduciary manager need an environment of mutual trust and this can break down if responsibilities are not clear and boundaries are poorly established.
The MNOPF defined its DCIO’s responsibilities to include:
- exercising judgement over the whole pension fund context, looking at investment opportunities and risks and appropriately aligning the fund assets and liabilities
- consideration of de-risking tools and opportunities where these are aligned with the investment strategy
- reporting progress both in funding terms and in the delivery of the mission and goals of the investment strategy.
The MNOPF Trustee appointed a second independent investment advisor (much like a non-executive director within a corporate board), to oversee the DCIO role and to provide the Trustee with the required assurance that the fiduciary manager is operating consistently with the Fund’s investment strategy. This is an approach that other funds could consider to mitigate any concerns over conflicts of interest.
Overcoming governance issues
Two major investment governance issues that can be addressed though fiduciary management are access to sufficient resource, and to required skills and knowledge.
Reducing investment volatility requires diversity of investment and access to a wide range of asset classes and investment vehicles. The complexity of such a model can often put it out of reach of a trustee board that cannot commit enough resource to the establishment and monitoring of such a diverse portfolio, or that simply does not have the skills to do so.
The MNOPF Trustee strongly believes that access to the resource and skills of the DCIO has been fundamental to the Fund’s ability to deliver the required level of returns with appropriate levels of volatility.
Speed of decision making
Inability to make quick decisions is a governance headache for many trustee boards. Investment conditions can change quickly, and yet most trustee boards only meet to take decisions quarterly or half-yearly! De-risking opportunities can be critical to many defined benefit schemes and a missed opportunity could be very significant.
The MNOPF employs various triggers which the DCIO uses to refer a decision to the Trustee. The management sub-committee can meet at short notice or make decisions by email, retaining control of decisions whilst minimising the risk of missed opportunities.
Always learning
Another fundamental of good governance is continuous improvement.
Fiduciary managers work with various schemes with different outlooks and strategies and will often have exposure to other investors. This allows them to highlight approaches or processes that have operated effectively elsewhere and which may benefit other clients. This has certainly been the experience of the MNOPF.
In summary
A fiduciary management arrangement can allow a fund to review, restructure and greatly extend its investment portfolio and can provide a far greater exposure to specialist investment managers than might otherwise be possible.
For the MNOPF, this has facilitated the implementation of a programme of award-winning core hedging strategies which have significantly reduced interest rate and inflation risk. The resulting improved funding levels and reduced levels of volatility, despite difficult investment conditions, are clear evidence of the benefits that the DCIO model has delivered.
Rory Murphy is chairman of trustees at Merchant Navy Officers Pension Fund
