This year I left my Christmas shopping to the last minute. I would not recommend it. All seemed well on Christmas Day with the usual smiles and joviality. However, on Boxing Day the first hint of problems started to emerge. “Do you really think red suits me” was the opening gambit, followed shortly afterwards by “I am not sure I wanted a sweater anyway.” All was not lost, as armed with the gift receipt, the sweater was soon replaced with a more appropriate item and harmony was restored.
Trustees may not be so lucky. They do not get gift receipts that allow them to correct any problems from an agreement entered into in haste. Nowhere is this truer than in agreeing a fiduciary management contract.
Is there a problem with investment consultants and actuaries already working with pension funds taking on additional responsibility as fiduciary managers?
The head of European distribution of one of the fiduciary management firms does not think so. In a recent interview with IPE he said “a fiduciary mandate relied on a long term relationship, requiring a company trusted by pension trustees. If you think from the investment consulting universe, aspects you’re buying from fiduciary management are those skills that exist in the investment consultant industry – for example, asset allocation decisions, decisions around liability management, plan design and implementation.”
If this were true and these skills do exist, then the trusted relationship would indeed be good reason to stay with the same provider. The question is what proof is there that the statement is worth accepting or indeed what evidence is there to the contrary?
Since the announcement last week that the Financial Conduct Authority would examine potential conflicts of interest in the investment consulting sector there has been significant comment about investment consultants promoting their own fiduciary management services. It is right that there has been.
Investment consultants are appointed by trustee boards to provide them with independent advice in the areas of strategic investment, asset allocation and manager selection. When it comes to manager selection trustees expect that the investment consultant will have carried out detailed research on the manager and a full review of managers in the sector before either recommending a manager or providing a short list of ‘best in class’ managers. Trustees are protected from any failure in the process, as manager selection decisions will be diversified across a number of different asset managers. The approach, although it does have some flaws, has worked effectively for pension funds for many years.
It is good to continue to keep the challenges involved with a change to fiduciary managemment (FM) at the forefront of trustees' minds. In our role helping trustees with the oversight and selection of investment consultants and fiduciary managers we have been requested, on a number of occasions, to assist trustees with the decision on whether to change to FM and, if they do decide FM is for them, to help find the most appropriate fiduciary manager for their scheme. However, it is the source of the request for our involvement that points to different standards in place at investment consultants that also offer FM.
Asset liability models sit at the heart of investment decision making at most pension funds. This is particularly true when trustees are determining the strategic asset allocation for the fund, the most important investment decision for any pension fund. However, unlike financial organisations that will typically consider the output from several different risk models before they put their capital at risk, pension funds base their decisions on the output from a single risk model.