Why should trustees be concerned about oversight of their fiduciary manager?
The Pensions Regulator makes very clear that trustees are ultimately accountable for all decisions made in relation to the appointment and monitoring of the Scheme's fiduciary manager. It emphasises the need to have processes in place to monitor the actions of these advisers including a process to 'regularly evaluate their performance and service'.
Trustees should also ensure that all their advisers and providers have adequate arrangements in place for disclosing and managing conflicts of interest.
What are trustees really accountable for in a fiduciary management relationship?
The Pensions Act 2004 states that trustees are accountable for all aspects of the Scheme including investment of the assets and maintenance of the funding ratio as agreed with a Scheme's sponsor. It is essential that prior to and once implemented all roles adopted by the trustees, fiduciary manager, custodian and other advisers are clear.
The tables below illustrate:
1. The key elements of the fiduciary management service provision and who is responsible for what
2. How this compares with a legacy advisory relationship.
This emphasises the differences between the two models and highlights the importance of robust oversight of the fiduciary managers given the breadth of discretion the manager is likely to have.
Fiduciary management involves significant delegation of authority to the fiduciary management provider. It is essential that trustees implement a governance oversight structure at the outset of the relationship which must allow appropriate visibility of:
- the resources of the fiduciary manager - investment management, operational and governance
- the key risks - operational and investment
- the performance of the Scheme assets - against appropriate funding and other objectives
What about the extra costs of oversight?
IC Select believe that, as long as appropriate reporting requirements for the fiduciary manager are established as early in the set up of the arrangement as possible, much of the cost can be absorbed by the fiduciary manager within their fiduciary management fees.
If the structure and approach is not addressed promptly, then governance oversight can add significant additional cost to a fiduciary management arrangement.
IC Select's Stewardship Service
IC Select's Standard Stewardship Service provides a framework of oversight which:
- complements and enhances existing oversight
- ensures that the Scheme's resources are applied most effectively
- consolidates all information into a single oversight report.
The framework also leverages the extensive due diligence carried out by IC Select on fiduciary managers.
The resulting robust oversight structure incorporates the following key elements:
- On-going due diligence of the fiduciary manager's investment decision making capability
- On-going due diligence of the fiduciary manager's operational quality, effectiveness and governance
- Oversight of the performance report
- Oversight of the operational risk management and breach reporting framework
- Quarterly reporting - qualitative assessment with best practice.
What is IC Select's process of due diligence on fiduciary managers?
IC Select's due diligence process is based on a thorough understanding of two fundamental aspects:
1. The investment philosophy and process of the firm
2. The operational and governance capabilities of the business.
The first step in the process allows gathering of information with the completion of due diligence questionnaires by the fiduciary managers which focus on:
- corporate aspects of the firm
- investment philosophy and process
- operational asepcts and governance.
The second step is regular due diligence meetings with the managers. These meetings allow IC Select to evidence that all aspects of the areas covered in the due diligence questionnaires are being implemented consistenty as indicated.
IC Select's approach is research led meaning that the firm updates its due diligence on nine of the largest fiduciary managers every six months.
The firm's assessment of fiduciary managers, which is conducted by experienced practitioners in both investment and operations, is from an investor's as well as investment perspective.
What does this mean for trustees?
IC Select's Stewardship Service provides many advantages for pension fund trustees:
- supports accountability of trustees and ensures total oversight of all potential issues
- provides a more time and cost efficient oversight and/or review process
- allows access to IC Select's full due diligence research of the major fiduciary managers
- complements and enhances any pre-existing oversight and governance
- allows trustees and pension officers for the Scheme to apply resources where they are most cost and time effectively applied.
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