A few early adopters have embraced fiduciary management in the UK. Gill Wadsworth asks whether they were wise to do so
Running a pension fund is a dirty job and it's getting dirtier. Volatile markets, draconian legislation and multi-million pound deficits create a working environment that challenges even the hardiest trustees, and there seems little respite for the foreseeable future.
Of course, trustees aren't alone; they have asset managers and investment consultants armed with tools, techniques and the ubiquitous ‘solutions' which promise to ease the many pressures they face.
Fiduciary management - which in the UK is the catch-all term applied to services that comprise the whole gambit of advice, manager selection and implementation of investment strategies - has stoked interest within the pension fund industry since it made its way across the North Sea from the Netherlands in the last decade.
Over the past three years, the number of providers offering fiduciary management, or delegated and implemented consulting (see survey in this section), has risen rapidly. However, the number of mandates actually awarded within the UK market has been limited.
Anne Kershaw, associate director at the consultancy Muse Advisory, says: "With perhaps a couple of exceptions, [fiduciary management] is all still in the ‘early adopter' stage in the UK and providers now typically will be up-front about the fact this is a slow but definite burn enterprise for them."
The ‘slow burn' effect is particularly apparent when it comes to full fiduciary management - where trustees hand control for all but strategic decision-making to a third party. Goldman Sachs Asset Management, for example, says it had "positive but modest" inflows for fiduciary management in 2011, adding one new client during the year.
Paul Trickett, head of global portfolio solutions at Goldman Sachs, adds: "The level of formal pitch activity for full fiduciary services is low, although we are aware of other schemes now considering this option."
Part of the problem stems from a lack of track record in the UK; fiduciary management simply hasn't been around long enough for providers to prove their worth. Consequently pension funds are choosing to dip a toe in the water before committing their portfolios to third-party control.
Patrick McCoy, head of investment advisory at KPMG, says: "Once the relationship has been built, clients then seek to hand over more delegation of the day-to-day decisions. The challenge for trustees is how to monitor and assess performance, and be clear who is responsible for certain decisions and the implementation."
The big Dutch players, which have amassed more experienced in the fiduciary market in their native Netherlands, have a slightly different perspective on the choice of full or partial services.
Cardano, which now runs approximately £4bn in UK pension fund money and refers to its offering as solvency management, says trustees typically favour full over partial mandates.
Richard Dowell, head of client services at Cardano, says: "This has become more common in the past year or so. It is important for trustees to consider what problem they are trying to solve before moving down a fiduciary management route as there are a number of different services available. I would argue that a manager selection-only role is not fiduciary management as there is no ‘management'."
Contrarily, Mn Services, which entered the UK market in 2009 and since mid-2010 has been appointed to seven UK pension funds with assets totalling £1.7bn (€1.9bn), says there is no such thing as a full fiduciary arrangement since trustees can never relinquish overall responsibility for their fund. Instead Mn tailors its service to meet a scheme's particular demands.
Colin English, head of business development at Mn Services, says: "Our approach is to provide a service designed to reflect each client's specific objectives, circumstances and requirements - therefore, we would be prepared to consider providing elements of our total service proposition, subject to certain minimum levels of responsibility."
Irrespective of whether it is better to appoint a fiduciary manager for a partial mandate or go the whole hog, the fact remains that relatively few mandates are being awarded at all.
According to McCoy, the lion's share of activity has been among the investment consultants that extended their traditional advisory service to include implementation.
"We are not seeing a great deal of appointments being made through competitive tenders. However some of the investment consulting firms have been successful in transitioning their advisory clients into their delegated offerings," he says.
When investment consultants go beyond their traditional boundaries it invariably raises questions about impartiality, conflicts of interest, whether investment consultants are equipped to manage money, and if the whole implemented/delegated consulting service is just a ruse to put up fees.
Muse's Kershaw says higher fees from consultants may be offset by the lower fees they negotiate with asset managers due to the scale of assets invested, although some might argue these economies of scale should be available, anyway, as part of the traditional consulting model.
She adds: "What should matter to trustees is that the net of fees, risk adjusted outcome is improved for the scheme. The difficulty is that this cannot be certain in advance, unlike the higher fees from the consultant or fiduciary manager which will apply."
Fees are proving a wider problem for proponents of fiduciary management, particularly since, as McCoy notes, there is no clear market standard for mandate benchmarking or performance fee measurement.
This barrier to entry is exacerbated not only by the small matter of short track records, but also by the ongoing confusion among trustees about what is actually on offer. The countless labels and differing descriptions make the fiduciary management market a muddle, which does little to entice pension funds.
Trickett says: "There is confusion over what fiduciary management is and the use of a variety of nomenclature - implemented consulting, solvency management. All of these names mean the same thing but are difficult for scheme trustees to follow. There is a natural tendency for caution in the UK pension structure and trustees feel the need to gain a good understanding of what is being offered before they make a decision."
According to Mn's English, consultants are also hampering the take up of fiduciary management since they may be unwilling to recommend fiduciary management where it is seen as a threat to their own business model.
"Investment consultants who wish to protect existing revenues will tend not to advocate consideration of such an approach or, if they do, they appear to be suggesting to their clients that there is no need to consider market alternatives other than their own fiduciary management-type solution," he says.
However, manifold obstacles are not enough to discourage providers from tackling the UK market, particularly since they believe trustees are looking for more dynamic investment management which requires levels of governance and resource that are often lacking in-house.
Ashish Kapur, European head of institutional solutions at SEI, says: "We expect substantially more interest in fiduciary management in the coming years as trustees and pension funds recognise the benefits from being proactive in asset allocation and risk management decisions. This is something which is missing from the current management process of most UK pension funds."
Cardano, too, sees frustration among UK trustees who, as Dowell sees it, realise "there must be a better way forward", and argues that fiduciary management could represent that way for many.
Indeed, if the UK follows the Dutch example, Dowell could be right. Mn Services notes that 11 years after the introduction of fiduciary management in the Netherlands, over 80% of Dutch defined benefit assets are governed by this model. And while the provider does not expect adoption to be quite so rapid in the UK, English predicts the "vast majority" of UK pension funds will use fiduciary management by 2020.
"The combination of market volatility, the maturity of funds and the restrictions on in-house resources are among the key drivers for the high level of interest in fiduciary management."
Like so many other approaches that have gone before it, fiduciary management will take time to become part of mainstream pension management in the UK. Handing control of a pension portfolio to a third party is no small undertaking for a trustee and since they retain ultimate responsibility for any shortcomings, they need to be convinced they are in safe waters.
In the absence of track records or established relationships with trustees, some providers may find it impossible to get out of the traps and could be forced to abandon their fiduciary offering before they really got going. For others, such as the investment consultants who have long-term associations with trustees, gaining a foothold in this market might prove easier.
Undoubtedly it is becoming more onerous to run a pension fund in choppy markets, but it is not a foregone conclusion that fiduciary management is the answer. Until there is trusted, impartial evidence that these managers can deliver on their promises, a widespread move to fiduciary management could be a long time coming.