Towers Watson received important backing in October for its implemented consulting offering following its appointment to an expanded ‘delegated CIO' brief by the £3bn (€3.5bn) UK Merchant Navy Officers' Pension Fund (MNOPF). Terminology aside, this is a fiduciary management agreement and as such is the largest in the UK to date.
Towers Watson had acted as investment adviser for MNOPF since 1990 and was appointed in 2008 to become "highly engaged" in its asset management decisions and selections. That agreement was subject in advance to review after a year.
The deal ranks Towers Watson among other consultants in fiduciary management terms: Mercer already runs around €5.8bn in fiduciary assets, while Cardano has €4bn and the UK consultant PSolve runs about €2.4bn, according to IPE's 2010 fiduciary management survey.
MNOPF has also issued an RFP for the appointment of an ongoing adviser following the year-long assessment process led by KPMG. Importantly, this could set a UK industry template to deal with one of the most obvious criticisms of the fiduciary management - the ability of the trustee board to objectively measure the performance of the provider.
"We are going to introduce a check and balance element to the delegated CIO with the appointment of an independent investment adviser," Andrew Waring, CEO at MNOPF, said. The aim is to provide "a level of investment specialist challenge to the delegated CIO and to ensure that the investment committee has the right tools to make sure it is making effective decisions".
He said the fund was looking to appoint the independent adviser in 2011 but did not comment on whether KPMG would be a preferred bidder. "We have a role specification but there will be full review and it will involve the appointment of a firm, not an individual," Waring added.
Waring emphasised that the latest appointment of Towers Watson also represented a step-change from the previous relationship, with the delegated CIO now taking on more responsibility. "There's a much greater delegation now with the hiring and firing of managers to speed up the implementation of investment decisions," he commented."
He also emphasised that the fund had undergone an internal governance review. "We started the exercise by reviewing our internal investment operation and that was one of the early part of the project," Waring commented. "We have delegated responsibility to our delegated CIO and our internal investment operation team closed at the end of September. One thing we are now working through with the delegated CIO is the role of the investment committee."
Roger Urwin, who will act as lead account manager for MNOPF, said the model sets a new standard in solvency management. "We are using all the tools available, with the emphasis on all investment opportunities, including LDI and buy-ins."
He emphasised that Towers Watson's role was carefully defined in the contract, and said some elements of the investment strategy would be determined on a joint basis with the investment. Urwin also saw the opportunity to speed up decision making. "When anomalies occur we are in a position to act more quickly as a result of this mandate," he commented.
The agreement will involve a fee structure intended to align interests between the two parties. "We have been keen to get an alignment of interests between the fund and the delegated CIO," commented Patrick McCoy, head of investment advisory at KPMG. "We're making sure the delegated CIO is accountable for the performance of the fund relative to the liabilities." No party was prepared to go into details on the remuneration structure.
MaCoy added: "We do not see these as short-term appointments but you do need active monitoring. We enter with the view that these are long-term appointments, although you will have to monitor them and make changes where necessary."
KPMG assessed candidates on their degree of engagement, their access to investment tools and solutions with particular emphasis on LDI, buy-in and other insurance solutions, the integration of their view of risk and return versus liabilities, and on the effectiveness and timeliness of their decision making and implementation.