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MandateWire: UK pension schemes seek fiduciary managers for their endgame strategies

This article was published in MandateWire| September 26, 2022 by Rachel So

A growing number of large UK pension schemes are choosing fiduciary or outsourced investment managers to handle their assets as they move towards their endgame with a focus on derisking.

As previously reported by MandateWire Analysis, data from MandateWire reveal that UK pension funds awarded 17 fiduciary management/multi-manager mandates worth a combined £24.9bn last year.

This was a notable rise on the 10 mandates worth a total of £5.2bn awarded in 2020, when the start of the Covid-19 pandemic disrupted fiduciary manager hires.

Trustees have been legally required to run a competitive tender process for fiduciary management services since December 2019. The Pensions Regulator recently published updated guidance on tendering for fiduciary managers as it prepares to take over regulation of trustee duties from the Competition and Markets Authority

Not only are the number of fiduciary manager awards rising, but the sizes of schemes opting for fiduciary management are also getting larger.

Last year, the British Airways pension schemes, comprising the Airways Pension Scheme and New Airways Pension Scheme with combined total assets of circa £26.8bn, outsourced around £21.5bn of assets to BlackRock.

This year, the Centrica pension schemes, with total assets of £10bn, appointed Schroders Solutions as their outsourced chief investment officer.

Larger schemes outsourcing assets

Lok Ma, DB solutions specialist at WTW, says the consultancy is seeing larger appointments for fiduciary management by schemes with assets of more than £1bn.

He says one reason for this trend is the recognition that “even a very large pension fund will not have the economies of scale and streamlined processes of a fiduciary manager, who is able to squeeze out further cost savings and efficiency improvements while staying on top of regulatory requirements”.

Another reason is the difficulties of resourcing in-house teams with the right expertise amid turnover, industry innovation and a transition towards endgame strategies. Donny Hay, director at IC Select, says the very large schemes, those with assets of more than £10bn, had often built in-house teams to manage their assets. These teams were largely focused on managing growth assets. With schemes now approaching full funding and with the main strategy focused on derisking, the skill set of these in-house teams may not match with the run-off of the scheme. He says this may lead schemes to choose a fiduciary manager instead.

Hay adds that the investment expertise and knowledge on the trustee board is often low or concentrated, and this opens schemes to key-man risk. “When a pensions director retires, employers are not inclined to replace them with another salaried person, so outsourcing or delegating becomes more attractive,” he says.

Benefits of fiduciary management

Ma says the main benefits of a fiduciary management model are more reliable outcomes, greater value for money and a reduced governance burden on the trustees. In particular, he says the performance of schemes with a fiduciary manager has generally been better than the performance of those with a traditional advisory model in terms of greater long-term funding level improvements, combined with lower volatility and protection in difficult markets. According to Hay, the fiduciary management model brings expertise, solutions to reduce risk and importantly, the ability to make faster decisions.

“A lot of trustee boards only meet three or four times a year, but markets move a lot between those times. Look at how fast interest rates have been moving [and] how fast equity markets have been moving. Often, if you want to make a timely decision, you need to make it in a timely manner. Markets don’t wait for you,” he says.

Delegating day-to-day investment decisions to a fiduciary manager can allow for swifter responses to changes in the market. Hay also says that delegating responsibilities to a fiduciary manager frees up more time for trustees to be more strategic.

One of the main responsibilities trustees have is to set the strategic investment objectives. However, specific decisions and actions, which are quite complex and time-consuming, can be delegated to the fiduciary manager.

“Things like the strategic asset allocation, portfolio construction, manager selection and environmental, social and governance reporting can all be handed to the other party,” he says.


Changing demands

Ma says pension schemes’ fiduciary management requirements have changed over the years. Ten years ago, schemes mostly wanted their fiduciary managers to deliver to a return target while closely managing risk. While this remains important as funding levels improve, some schemes are also looking for fiduciary managers who can run portfolios with a greater focus on generating reliable income, or managers who know how to build up assets towards an insurance buyout goal.

He says: “In this way, most of our clients these days will have an eye on the endgame, whether that is run-off or buyout.” Hay agrees and says schemes are now looking for managers to support the endgame management of investments. “The demands are changing because schemes are maturing and their emphasis is much more on risk mitigation, liquidity management, and sensitivity and scenario analysis,” he says. However, he adds that finding the right fiduciary manager is not easy. What might be right for one scheme could be quite different for another. “Finding a UK equity manager is like going on a date. Finding the right fiduciary manager is more like finding a partner for marriage who will be with you forever and will look after your needs,” Hay says.

Ma also says there is increasing focus on sustainability and ESG factors. “Most trustees are keen to understand the environmental impact of the portfolios they could end up investing in, and how they can avoid the losers [and] pick the winners as the wider economy transitions towards net zero,” he says. Many pension funds are also keen to understand the level of diversity in the fiduciary management team they would be working with, as well as the level of diversity across the company, Ma adds.

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4th October 2022