Achieving value from your pension scheme investment consultants

A recent article in the FT highlighted a growing discontent among pension scheme trustee boards regarding their investment consultants.

British pension schemes prepare to axe investment consultants

The sentiments expressed in the article are entirely relatable. Many pension scheme trustees are currently experiencing deteriorating scheme funding positions and so there is significant pressure on trustee boards to ensure that their investment strategies provide the right mix of stability and strong returns. The report from the UK’s Financial Conduct Authority with talk of the investment consultant market being rife with opaque fees and conflicts of interest is just another painful barb in an already thorny issue.

David Weeks, co-chairman of the Association of Member Nominated Trustees mentions that trustee boards could achieve savings by scrutinising their investment consultants.
“Boards of trustees are taking a new look at [their relationships with investment consultants]. We are conscious that there are potential savings to be made by asking the right questions.”This sounds like a promising endeavour, but what questions should trustee boards be asking of their pension scheme investment consultants?

Here are a few openers:

  • There is the obvious issue about benchmarking the consultant’s fees against the competition. As a starting point, how much does the incumbent consultant charge for a strategy review compared to the market?
  • To what extent has the incumbent consultant helped negotiate down (if at all), the pension scheme’s management fees?
  • Are some services actually needed? For example, is a beauty parade for manager selection a necessity for the scheme, or is it a waste of time and money? What value has the consultant added?
  • How have the consultant’s proposed managers performed relative to the manager’s benchmarks?
  • Given the higher manager and consultant fees associated with active management of certain asset classes, does the pension scheme really need active management in all cases?

Whether you are determined that the axe must fall on your current investment consultants, or you merely want to get a health check of your pension scheme’s investment arrangements, it is worth asking questions so that diligent decisions can be made.

However, the business of asking questions comes with a caveat in the form of one further question – do you fully understand the answers that you receive?

This might be the hardest question to answer, and it’s where trustee boards that are in doubt as to their ability to provide an affirmative answer may wish to shore up their expertise in pension scheme investment matters with a specialist, independent trustee appointment.