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Friday 18 October 2019

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Expert decisions

Written by Amanda Leek
October 2012

More European pension schemes are recognising the value of fiduciary management as it adapts to trustee concerns and market conditions, finds Amanda Leek

Fiduciary management now accounts for 89 per cent of assets under management (AuM) in the Netherlands, mostly DB pension schemes, since Anton van Nunen first conceived of a ‘new way’ of consulting with accountability for implementation of advice in 2001. Providers from the Netherlands were quick to provide to the rest of Europe - 15 out of the 20 firms actively offering fiduciary management in the Netherlands, in Spence Johnson research in 2011, have UK clients and some also operate in France and Germany. The 114 firms and pension schemes studied showed a dramatic surge in take-up of fiduciary management in 2009.

Shorter, more volatile market cycles, closure of schemes resulting in defined timeframes to make up deficits, limited contributions from sponsors and low returns from traditional assets all combine to make investment decisions arguably the hardest for European pension scheme trustees and investment committees, requiring more focus and expertise than most can afford to give. In Aon Hewitt’s 2012 Delegated Investment Survey, 64 per cent of trustees and financial directors said they spend five hours, at most, per quarter, on investment decisions – and 41 per cent said these decisions are made too slowly and therefore miss opportunities.

Large schemes can afford to hire a team of investment professionals in-house but for small and mid-sized schemes, fiduciary management offers the ability to delegate investment decisions from one asset class to the entire strategy to a fiduciary manager responsible for executing, implementing and providing pro-active strategies and advice for quicker decisions.

The predominant providers in the Netherlands are in-house pension funds who expanded to provide fiduciary management to third parties. But across Europe, with different terminology, there are two competing categories of provider – asset management firms now including advisory services (such as BlackRock, ING, Russell Investments or SEI) or consulting firms combining asset management services (such as SECOR, Aon Hewitt, P-Solve or Towers Watson) to provide holistic solutions. The latter often use different labels such as delegated or implemented consulting.

There is therefore confusion over what fiduciary management actually is, but it is clear it solves investment problems facing trustees, and services are adapting to trustee concerns over delegation, their ultimate responsi-bilities and shifts from DB to DC schemes.

Ernst and Young’s definition of fiduciary management is widely cited in the industry. They say it is not an investment solution per se, it is a governance solution. It focuses on the management and progression of the funding level, not just the assets, and enables trustees to delegate investment decisions and free up their time to focus on key strategic issues.

But maybe the definition itself doesn’t matter. Russell Investments head of business development Colin English says. “It doesn’t really matter exactly what the basic premise is. Fiduciary management is a better way, an enhanced governance solution, for developing and implementing investment strategy. It’s as simple as that.”

So what sizes and types of pension schemes most benefit?

The first review of the market done by KPMG in 2011 found 4 per cent of UK pension schemes, in excess of £40 billion AuM or 200 pension scheme mandates, used fiduciary management.

Smaller schemes with trustees and committee members lacking expertise or time benefit the most from delegation. As a rule, fiduciary managers prefer to deal with funds with assets worth £200 million or more but some do accept £10 million or lower amounts, according to Capita Hartshead.

But larger schemes or those with more sophisticated trustee members relative to smaller schemes are more used to a customised offering of fiduciary management, says SECOR portfolio manager Gino Reina. The more sophisticated the trustees are, the more they are able to ask the right questions and maximise the value they get from their fiduciary manager. He says: “The ideal relationship is to have a level of sophistication internally and use a fiduciary manager as a resource to come up with your own decisions.”

The market is growing rapidly and currently 30 firms across Europe provide fiduciary management services for 517 clients. Of the €761 billion AuM, 6 per cent is located in the UK, 2 per cent in Germany, and the remaining 3 per cent mostly in Italy and France.

“UK trustees are more willing to delegate whereas in the Netherlands they still maintain a lot more control as they have experts such as university professors on their trustee board, and chief investment officers running very large schemes,” says SEI head of European institutional solutions Ashish Kapur. “The level of pension knowledge on trustee boards in the Netherlands is much higher than the UK which means they are able to handle a number of tasks internally.”

The speed of decision making and execution, improved risk management and increased diversification and sophistication are all advantages of fiduciary management cited by over 30 pension fund trustees and institutional investors in a Russell Investments poll.

English explains: “One of the differences between consulting and fiduciary management is that if I was your fiduciary manager and I make a recommendation that you accept, I have responsibility for implementing that.. I am making it happen, as cost effectively as possible.”

But this level of responsibility works both ways. It is the fiduciary manager’s responsibility to educate and inform the trustee board so they know the risks being taken while the trustee needs to ensure they only delegate when they fully understand what the fiduciary manager is doing as they have ultimate responsibility.

English says: “Fundamentally trustees ought not to delegate anything if they’re not aware of the implications. So if you told me to invest your £100 million pension fund as I want and come back next year and tell you how I’ve improved your funding levels, I think that’s a step too far.”

With this ultimate responsibility, trustees may be understandably nervous about delegating too much but at the same time they need to be honest about how much of the investment process they can handle on their own. A solution to this has developed in the UK, initially used in the Netherlands: the use of a third party, such as an independent trustee, consultant or specialist, to help in the selection process. Once the fiduciary manager is hired, these same specialists continue to monitor their performance.

Kapur encountered another selection process: “During a recent selection process in the Netherlands they did something very interesting to determine how to pick the most appropriate fiduciary manager. They decided to have dummy trustee meetings with providers and say ‘okay, you’re the fiduciary manager, what would you do?’ – almost like a role play.” He says that gives schemes insight into how the relationship will work.

The biggest development to come is the shift from closing DB schemes to increasing assets in DC schemes. Can fiduciary management improve both scheme types?

“For a DC scheme, you can bring a fiduciary manager in to help create a better default fund which is managed much more dynamically, more actively, than previously,” says Kapur. “On the continent, places like Germany and Belgium have minimum return requirements for their DC schemes. You could build some of those minimum return ideas into your DC scheme to give people a greater certainty of the benefit they will get. To implement something like that, you will need a specialist, and that’s where fiduciary management comes in.”

In the UK, English observes thoughts beyond the current focus on DB schemes. “I’ve already had tentative conversations with an industry-wide UK body about how to apply the fiduciary management proposition to their industry-wide DC scheme. The situation is so early as to hardly be worth a mention but that’s not the point. I can see it happening. It might be five years down the road or it might be quicker, but it will happen.”



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