A new generation
Written by Christine Senior
Christine Senior explores how fiduciary management is evolving into a flexible, modular solution for pension funds
Fiduciary management has been around for some years now, especially in its birthplace the Netherlands, and Dutch pension funds have built up enough experience to evaluate managers’ performance and judge which providers and business models were most successful. Fiduciary management in Holland is now evolving, driven both by demands from pension funds themselves and from the Dutch pensions regulator itself.
From its inception the role of the fiduciary manager combined a number of different elements: an asset liability study, formulation of an investment strategy, selection and appointment of investment managers, performance monitoring, overall risk management and reporting back to the board. Increasingly this model has proved inadequate: not all fiduciary managers have equal competence in all elements.
But fiduciary management is in any case not a uniform product across the board. Different providers offer different versions, based on their own strengths. Some are subsidiaries of the large Dutch pension funds that were forced by regulation to demerge their administration and asset management arms from their pension schemes.
Among these are PGGM and APG, which act as fiduciary managers for their own pension schemes as well as taking on mandates to act for other smaller schemes. Other providers are multi-managers such as SEI and Russell Investments which can build on their manager selection capabilities.
Yet others are themselves asset management companies, which may use their own in-house funds as well as outsourcing management for asset classes where they have no in-house expertise.
ING Investment Management, for example, offers what it terms a ‘total solutions approach’ from full fiduciary to strategic advice.
A spokesperson explains: “Balance sheet management has become an ever more difficult task, with capital markets and the regulatory environment getting more and more complex. It can certainly be a significant drain on resources and it takes in-depth knowledge of all aspects of investment management.” As a result, the firm now offers a customised service to help pension funds manage their balance sheets with its Implemented Client Solutions (ICS).
Governance has been an issue in some cases of fiduciary management. Fiduciary managers who use in-house funds, for example, may claim to offer a lower cost service, but inevitably they face accusations of conflicts of interest. Their own funds will never outperform in all circumstances over all time periods.
But this should not necessarily be a stumbling block, says Jan Willem Siekman, head of investment consulting at Aon Hewitt in the Netherlands. “Conflicts of interest have to be managed in all areas of life. It’s a question of being open and transparent. These fiduciary managers have to have the right governance structures in place to show how the selection process was carried out, whether they are hiring themselves or another manager,” he says.
Remaining in control
Pressure for change has come both from pension funds themselves, dissatisfied with performance from their fiduciary managers, and from the regulator, the Dutch central bank (DNB) which has drawn attention to some of the weaknesses of this kind of management.
In April this year the DNB issued a statement which underlined the importance of pension management boards remaining in control, when they delegate management of their fund to a fiduciary manager. A pension fund board can never delegate overall responsibility for the fund to a third party. On the basis of a survey it had conducted, the bank identified a number of inadequacies: pension fund risk management was not good enough for the complexity of investment mandates; boards often lack “countervailing power”, so they are not always capable of evaluating what their investment manager or fiduciary manager is doing for them; and the level of risk management of illiquid or innovative investments is not good enough.
Peter in de Rijp, head of fiduciary management for the Netherlands for SEI explains: “The Dutch central bank called for an independent role, ideally to be picked up by the board of the pension fund itself, to make its own assessment of what is going on in the investment portfolio, separate from what the fiduciary manager or the investment manager is reporting, because the regulator thinks the board can’t be entirely dependent on what the fiduciary manager is reporting back.”
Martin Nijkamp, Implemented Clients Solutions (ICS) at ING IM adds: “Everybody now understands the regulator’s position. A lot of pension funds are saying: I may still need a fiduciary manager for some functions, but for others, notably monitoring, I need to take this back in-house for my own specialists, or at least have second-opinion providers so I fully understand what the manager is doing with my money, my balance sheet. It’s a kind of second wave in the market."
The level of expertise among pension funds varies a great deal, continues In de Rijp: “From our experience we have seen there is a lot of difference at pension funds in the extent to which the board or investment committee can give feedback on what the fiduciary manager brings to the table.”
Gerard Roelofs, head of investments, continental Europe, at Towers Watson, also highlights some of the criticisms. “Up to two years ago it was standard practice to buy all the modules as a package and call it fiduciary management.
“In 2009/10 there were some Dutch committees in place investigating whether there was still alignment between the pension fund and its participants and
the fiduciary manager. The Dutch central bank thought fiduciary managers had become too powerful, i.e. the pension fund boards were not in control of their duties. They had outsourced so much to the fiduciary managers it was easy to create misalignment of interests. But that isn’t 100% my opinion,” he explains.
Another critic of fiduciary management in its original format is Paul Boerboom, founder and managing director of specialist adviser Avida International. He believes the first generation of fiduciary management was a failure, which the crisis made very clear.
“For example in the old days pension funds gave the fiduciary manager or implemented consultant a mandate to select managers, and monitor as well. This made the pension funds too dependent on their fiduciary, which obviously wasn’t going to work,” he says.
Over the past five years or so fiduciary management has been evolving. The new model is more flexible and modular. Increasingly pension funds are deciding to break down the service into component parts, appointing different managers for each. The product has become more customised with pension funds deciding which parts of the whole they want to outsource.
This “new generation” of fiduciary management has become much more flexible and focuses on clients' needs in a modular way. “For example”, says Boerboom, “we distinguish between strategic balance sheet management and the implementation of the underlying portfolio. These are two completely different things which need dif-ferent skills. There are many examples where one provider advises on solvency management, and another implements the underlying portfolio.”
Roelofs is seeing pension funds taking strategic advice separately from the rest of the fiduciary management package, but he also highlights the increasing importance of risk management.
“Some pension funds also install an oversight committee that controls and monitors what the fiduciary manager is doing.”
As it evolves, fiduciary management is expanding as well as changing. It is gaining appeal outside its Dutch stronghold, particularly in the UK and Germany. And other providers are setting up shop to take advantage of the surge in interest from pension funds. Insurance company AXA, for example, has moved into the ranks of fiduciary managers, building on its expertise in risk management.
A further development highlighted by Marc Bout, a partner at PwC in the Netherlands, is the potential for multinationals to become fiduciary managers for their worldwide pension arrange-ments. He is aware of one such scheme, which is offering integrated asset liability management, asset management and risk manage-ment to its subsidiaries’ pension plans. “The biggest multinationals have the scale to hire good technical and research professionals,” says Bout, “so they are the parties which may soon be competing with the standard fiduciary managers.”
Christine Senior is a freelance journalist