Fiduciary management: a breath of fresh air
Written by Christine Senior
Sept / Oct 2009
Fiduciary management is certainly gaining ground among pension funds, with the Netherlands the leader in embracing the concept. Bureau Bosch has just published research showing that 77% of total Dutch pension scheme assets of E580bn are managed this way. It's hardly surprising that Dutch pension funds are so far ahead, since fiduciary management emerged in the Netherlands. Anton van Nunen, who is generally acknowledged as its architect, defines the process as having five elements: advising the pension funds on the asset liability study (or validating the ALM if it is carried out by a consultant); portfolio construction to provide the highest return for the given risk budget; manager selection; monitoring of the managers; and reporting back to the fund.
But the field has been complicated by the advent of other similar services which go under various names - implemented consulting, delegated consulting and solvency management, for example. Patrick Disney, managing director SEI's Institutional Business for EMEA, says some differences come down to benchmarks and objectives. The objective of solvency management is to achieve a particular funding level by a particular time, or there could be a performance objec-tive which should eventually lead to the desired funding status. The second differentiator depends on who is providing the service, whether asset manager or consultant.
Fiduciary management has been evolving since its original model around seven years ago, Paul Boerboom, founder of Avida International in the Netherlands, explains: "We have just gone through a crisis and the way fiduciary management was designed a few years ago was not successful compared to what clients were expecting," he says. "If you look at the coverage ratio of those pension funds who were clients of the first generation fiduciary management, they are not happy. Fiduciary management has not delivered on its promises."
Boerboom has more faith in new style fiduciary management: "Looking forward, what I call fiduciary management - the next generation, with a lot of attention on strategic liability led risk management, that model is working in Holland and will work in other countries," he says. "It will also work for DC plans. When you have liabilities you need professional expertise to manage assets against liabilities. It could work in the UK, Scandinavia and Germany."
Demand for fiduciary manage-ment in the Netherlands has been boosted by several factors, including more onerous regulatory requirements and the changing investment landscape which brings ever more complex investment strategies and products to the table. A third element is the decline in importance of defined benefit (DB) schemes to employers as a means of attracting and retaining talent. A closed DB scheme means fewer staff are active members, and it loses its importance as an employee benefit, while more often than not proving a drain on the company's finances. "Effectively there is an end game in sight" says Lloyd Raynor, senior consultant at Russell Investments. "The reason pension funds are more interested in fiduciary management is to avoid crystallisation of deficits or surpluses as the end of the life of the scheme approaches, to help institute real time decision-making in the face of ever rarer opportunities to derisk and to ensure greater precision in asset liability management which is of greater importance as active employee contributions dry up."
Outside of the Netherlands, fiduciary management is on the rise. Two high profile UK adopters, for example, include the Merchant Navy Officers Pension Fund and the Metal Box Company pension fund. Germany is also proving fruitful territory for fiduciary managers: BlackRock has won a mandate from Henkel, for example, which gives BlackRock the responsibility for the multinational's pension schemes in five countries - Germany, the Netherlands, the UK, Ireland and the US. "We manage all global Henkel DB assets on a fiduciary basis," says Leen Meijaard, head of institutional business in EMEA for BlackRock. "We have to deal with local trustees in each country, and with Henkel the corporate on a global level. For multinationals the advantage of fiduciary management across the DB plans in different countries is it gives consistency across different pension plans in manager selection and risk management at corporate level, which is a big advantage."
Van Nunen also confirms that pension funds in the Nordics, Austria and Switzerland have signed up to the concept, and even Japanese pension funds are interested.
Despite this growth, fiduciary management is not without its detractors. One of the often voiced reservations is the question of how you measure whether your provider is doing a good job. Van Nunen suggests peer group comparison is the best solution. But Gaynor says a peer group benchmark isn't ideal because even for similar schemes which are set to wind up in the same year, each set of trustees would have a different risk tolerance, so comparisons would not be legitimate. "The obvious thing is to have a clear time horizon in sight. Also have a balanced scorecard of metrics where you evaluate the strategy in relation to a composite benchmark and where you consider how the strategy is doing versus the liabilities and perhaps versus other metrics such as an RPI plus target."
Fees are another source of concern. The open architecture model gives managers with a huge pool of assets the clout to win fee reductions from managers.
But Meijaard says the BlackRock model which uses mainly its in-house funds is a more effective way to keep fees low. "We tend to manage most of the assets internally, which offers the client an advantage because they do not have to pay a double layer of fees," he says. "As a fiduciary manager if you have lots of assets under management you are probably able to negotiate with external managers to get a better fee but they will never come down to the level of internally managed funds."
Written by Christine Senior, a freelance journalist