UK schemes happy with fiduciary manager cost transparency: survey

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UK defined benefit pension schemes are satisfied with the transparency of all fees and costs associated with their fiduciary management, according to Aon Hewitt’s latest survey of UK pension funds’ use of the strategy.

It was the first time it asked about this in its fiduciary management survey, which it has carried out for the eighth time. 

Of 96 UK defined benefit scheme respondents that used fiduciary managers, 95% reported their experience of transparency with all fees and costs to be “excellent”, “good” or “satisfactory”.

Overall satisfaction with fiduciary managers remained high despite regulatory scrutiny, the survey showed. Of the respondents, 98% reported their experience to be “excellent”, “good” or “satisfactory”.

Similar results came when respondents were asked to rate standards of client service, risk controls and the impact on funding level.

Cost transparency is of particular concern to the UK regulator following the publication in June of the Financial Conduct Authority’s (FCA) Asset Management Market Study. In it, the FCA raised concerns about competition in the investment consultant sector and the transparency and independence of fiduciary management services.

Aon Hewitt’s survey found more schemes to be using either partial or full fiduciary services than in the same survey last year. UK funds said investment expertise and “nimbleness” were the primary reasons for opting to outsource.

When selecting a fiduciary manager, the survey showed evidence that clients were putting providers under more scrutiny and seeking more face-to-face contact prior to awarding mandates.

In addition, 90% of respondents cited transparency of performance and risk as an important factor when choosing a provider, and 85% transparency of fees and costs.

Sion Cole, senior partner and head of European distribution for Aon Hewitt’s fiduciary management business, told IPE: “Most investors are aware of the explicit management fees charged by their fiduciary manager and underlying investment managers. However, the additional investment costs associated with an investment mandate – for example, custody, administration, transaction costs – have historically been the subject of less scrutiny and hence less well understood.”

Aon was seeking to address this through measures put forward to the FCA as part of a joint response with Mercer and Willis Towers Watson to the regulator’s work on the sector, Cole said.

“We believe that all areas of pension schemes (not just those with fiduciary management) should be encouraged to maximise the quality of their reports and transparency of all their fees and costs so they can readily compare fees and performance across different schemes,” Cole said.

Since 2011, the use of fiduciary managers by small and medium sized schemes increased from 28% to 52%. Two in five large schemes (40%) said they used fiduciary managers in this year’s survey, up from 17% in 2011.

Cole said a number of advances in the past 18 months had led to a “wider range of fiduciary solutions and greater tailoring”. This had increased the popularity of the service among larger schemes in particular.

“This allowed large schemes to have more influence on their solution and be actively involved in the mandate alongside the fiduciary provider,” Cole said. “For example, large schemes have been able to have their in-house teams work with the fiduciary manager and be part of the decision-making process. They have also been able to stipulate unique restrictions and have their investment beliefs taken into account within solutions – for example, restrictions around the use of global macro within a hedge fund mandate and a unique return target net of fees.”

He added that, in some cases, pension funds had chosen to adopt aspects of fiduciary management infrastructure and operations “to help improve their own investment decision-making and speed of implementation”.

“The list of possibilities for large schemes and the level of tailoring really is endless and is helping to drive this demand,” Cole said.

The FCA is expected to decide this month whether investment consultants are to be referred to the Competition and Markets Authority for an in-depth competition review.

For more on cost transparency and investment advice for UK pension schemes see the September issue of IPE Magazine

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