Holistic answers needed
Fiduciary management was conceived as a sophisticated and holistic solution to the shortcomings of pension asset management that became evident after the equity market downturn of 2000-03. Among these were a lack of centralised portfolio oversight, lack of integrated risk management, and an over-reliance on outsourced managers without systematic monitoring.
Yet the 2008-09 crisis revealed the shortcomings of those first fiduciary mandates themselves – for instance that some fiduciary managers were not as responsive to asset class opportunities as their clients expected. The Dutch regulator also found shortcomings in the risk management processes of some large pension funds. First generation fiduciary contracts, which tended to emphasise manager selection over risk management, were overhauled.
Since then, sophisticated risk management systems and approaches have become embedded within many large pension asset management organisations so it no longer makes sense to see fiduciary management as a distinct service – rather it is a bundled risk and asset management offering that pulls together strands of pension fund management that have long become best practice.
In the Netherlands, the market has become used to a high degree of customisation of fiduciary contracts with various levels of in and outsourcing, combined with high levels of internal control.
In the UK, large consultants like Watson Wyatt (now part of Willis Towers Watson) spent years saying they would not blur the boundaries between manager selection and implementation, only to embrace fiduciary management with a vigour that alarmed the Financial Conduct Authority so much that it referred the entire industry to the Competition and Markets Authority (CMA).
“It remains to be seen whether the new generation of consolidator funds will provide a true and lasting solution”
The CMA has just released its report on the matter – clearing the consultants of any suspicion of unfair competition, but highlighting market distortions brought about by the size of the main players. The CMA also believes trustees have low levels of engagement with the fiduciary outsourcing process and has recommended compulsory tendering.
While in the Netherlands, fiduciary managers have finessed their offering to fit the needs of a sophisticated group of clients, in the UK it has remained a mainstay of smaller, less sophisticated funds that do not enjoy economies of scale.
It is impossible to say whether the CMA’s proposed remedies will benefit pension funds and their members. In any case, the CMA’s review is not a holistic answer to the true underlying problem of UK pensions – namely that the DB market is fragmented with an extensive shortage of investment trustee skill and knowledge, despite the generally good job that most trustee boards are doing.
It remains to be seen whether the new generation of consolidator funds will provide a true and lasting solution to these enduring underlying problems.
Liam Kennedy, Editor