Outsourcing: Avoid the bear traps
In a BBC radio programme last year on business issues, the CEO of Serco, Rupert Soames, said that only “stupid people and lazy people” should not outsource.
The trend to outsource business activities is long standing, probably emerging from the engineering sector in the late 1970s. In assetmanagement, certain activities have been outsourced for a number of years, particularly in the areas of back and middle office, and fund administration.
Outsourcing of core activities like pension fund investment to a single party is both a new trend and an old one. Pension funds historically outsourced assets to a single balanced manager, a practice that went out of fashion from the 1990s onwards. Outsourcing on a more comprehensive basis to a fiduciary manager gained currency in the Netherlands from the early 2000s, and has caught on in the UK since then.
Indeed, the UK’s fiduciary management market now officially exceeds providers’ expectations, according to KPMG’s latest annual report on the business segment. When KPMG asked providers to estimate the future size of the market in 2011, no-one put the figure at more than £100bn (€139bn).
The actual AUM figure for the UK fiduciary market is £114bn, covering both full and partially delegated mandates, which is about 10% of overall pension assets. Some 620 funds use fiduciary management in some form, with 382 of those outsourcing all assets.
As might be expected, the UK’s numerous small pension funds are a prime source of new business for fiduciary managers, accounting for two-thirds of new mandates in 2015, and the likely reasons – governance, diversification and better risk control – are not hard to discern.
How can these funds ensure they get the most out of a fiduciary mandate? They could certainly learn from Dutch funds, which by regulatory decree must have sufficient internal control and resources to scrutinise and oversee the fiduciary manager. Some funds that delegated too much decision-making authority, notably the Vervoer pension fund in its relationship with Goldman Sachs Asset Management, later ended up with problems.
But only 23% of the UK’s fiduciary management appointments were advised by an independent third party, which has led some to conclude that consultants are ‘upselling’ small clients to higher fee fiduciary arrangements. Only 13% use an independent party to monitor the fiduciary manager. It is impossible to know whether all these funds are doing the right thing.
Outsourcing a core activity like pension fund investment management involves considerable bear traps. Avoiding these involves time and diligence on the part of trustees, who need to adapt to a considerably different and potentially more challenging role.