Getting to Grips with Managing Schemes' Investments

The Competition & Markets Authority (‘CMA’) has issued its final version of their investigation into the investment consultancy and fiduciary management services used by UK pension schemes.

Briefly, the CMA is going to:

• Require competitive tenders for first-time fiduciary appointments (or within five years if the appointment was made without a competitive tender being undertaken);
• Require investment consultants to separate marketing of their fiduciary management and to inform customers of the above tendering requirements;
• Require fiduciary managers to provide better and comparable information on fees and performance;
• Require trustees to set objectives for their investment consultant; and
• Require investment consultants and fiduciary managers to report on performance using basic minimum standards.

As a result, trustees will now have access to more guidance, better information and greater transparency when making decisions on their investment adviser and fiduciary manager. This will hopefully drive better outcomes in terms of a better quality of service and getting value for money. These changes are a good way to encourage more competition and ensure that trustees have access to better information when making choices. Further, these requirements should eliminate the practice of investment consultants simply flipping their services to fiduciary management, thereby materially increasing their fees.

However, for some schemes this does provide an additional governance burden where they may not have the time or expertise to deal with the additional requirements set out by the CMA.

Ultimately all trustees, whether professional or not, are working on behalf of their members to ensure they receive their full benefits when they fall due. Whether or not a fiduciary manager is appointed by trustees is an important decision in this process, and if one is appointed then the right one should be chosen. That will mean challenging the recommendation of the investment consultant and looking more broadly at the market for fiduciary services. For trustees, the CMA’s recommendations are reassuring and supportive of the trustees’ ultimate goals. However, the governance burden this now puts on trustees is material and so all trustee boards, including sole trustees need to make sure they have the skills and time needed to deliver the CMA’s recommendation for the Scheme and its members.

This is where a professional trustee can provide invaluable support to the scheme, as they have specialist skills and knowledge in running schemes that can help a trustee board to make more informed decisions. The CMA has mentioned in their review that schemes with a professional trustee are likely to be more engaged, which can facilitate better decision making. Therefore, more schemes should consider this if they feel as though they are out of their depth, or simply do not have the time needed to fulfil their duty to members.

This can help to drive better outcomes for the scheme. For example, the professional trustee’s experience of the market can be leveraged to challenge any advice received, or costs quoted by the current advisers, which may not have happened otherwise. This in turn could lead to more competitive pricing or to receive a better service, which the CMA is ultimately looking to achieve. In addition, some trustees, like ourselves that have internal expertise around investment, could help select and monitor a fiduciary manager.

In our view, the CMA’s recommendations should be welcomed by all stakeholders as they can only serve to improve the quality of service and value for money trustees receive. This in turn will benefit the members we serve.