The fiduciary management industry in the UK has faced several challenges this year as it strives to adapt to the new landscape following the Competition and Markets Authority (CMA) Review and current volatile market conditions posed by a rotation away from growth assets, war in Ukraine, a Gilt crash and liability-driven investments (LDI) collateral crisis.

Despite these challenges, research by consultancy Isio found that fiduciary management rebounded in 2022 with the total number of mandates growing 7% compared to 2021. However, the growth rate remains below pre-2020 levels, suggesting growth may have peaked, while the industry’s total assets under management (AUM) fell for the first time since pre-2008.

Isio’s annual fiduciary management survey – Latest trends in fiduciary management – quantifies the impact of challenging market conditions for fiduciary managers, finding that total AUM decreased 5% to £218bn in 2022, largely as result of a rise in yields driving declines in Gilts and LDI portfolios, and the difficult backdrop for growth assets.

Paula Champion, head of fiduciary oversight at Isio, said: “This year’s market volatility and challenging macroeconomic environment have tested fiduciary managers, shrinking total AUM despite a healthy increase in mandates among the largest and smallest schemes.”

She added: “While it’s great to see schemes are further along their journeys to buyout and self-sufficiency, and the impacts of the CMA’s review are now bedded in, there are significant hurdles ahead for the fiduciary management industry. First and foremost is the decision on whether to continue increasing hedging levels following the LDI crisis, as well as a broader revaluation of the role that LDI, which had been increasingly significant to portfolios, should play from here.”

Isio found that the impact of market conditions on AUM was significant enough to outweigh the rise in assets from pension schemes that were new to fiduciary management over the year. In 2022, a few large schemes entered the market through outsourced chief investment officer (OCIO) solutions with fiduciary providers and, without these, the fall in AUM would have been much greater.

Utilities firm Centrica’s pension schemes awarded an OCIO mandate to Schroders Solutions in April for their £10bn (€12bn) of assets. It was the largest OCIO mandate recorded by IPE in 2022.

While the number of £1bn-plus pension schemes using fiduciary managers has increased, the percentage of the market they represent stayed level, Isio’s research showed. By contrast, there was a more significant increase in the number of smaller schemes using fiduciary managers and those with less than £100m in assets now represent 62% of all mandates by number, versus 54% in 2021.

Big mandates drive down fees

Isio asked fiduciary managers what their fee would be for a scheme targeting a return of Gilts-plus 2% per annum in five different asset size buckets. The data shows no movement in fees over the year except for schemes of £1bn+ in size, which have driven down fees from 0.11% in 2021 to 0.9% in 2022.

The data contrasts sharply with the previous year when fees for schemes of £1bn-plus increased (from 0.10% in 2020 to 0.11% in 2021), while those for every other mandate size stayed the same or fell.

Isio fiduciary managers

Source: Isio

Fee pressure from larger schemes is likely a result of continued retender activity prompted by the CMA’s review and 2021 deadline, competitive pressures in the market between fiduciary managers and operational costs decreasing, from technology improvements to economies of scale.

Positive outlook

Despite the challenges of the past year, UK pension schemes are moving rapidly along their journeys towards buy-out and self-sufficiency, buoyed by the strong performance of growth assets in the post March 2020 environment and the more recent decrease in buy-out liabilities as yields have risen.

Isio found higher liability hedging targets across all fiduciary managers up to June 2022, with the proportion of schemes more than 80% hedged rising from 68.6% in 2019 to 94.1% in 2022.

Additionally, fiduciary managers have decreased return targets for schemes, with the proportion targeting 2.51-3.5% above liabilities falling from 28.6% in 2019 to 21% in 2022. Meanwhile, those with targets of 0.51% to 1.5% above liabilities rose from 24.2% in 2019 to 34.4% in 2022, the consultancy noted.

“Longer-term, fiduciary managers will have to adapt to both the increasing impact of regulation, in particular around ESG, as well as the changing face of the industry as [defined benefit] DB schemes mature. Currently Task Force for Climate-Related Financial Disclosures (TCFD) reporting requirements only apply to schemes with assets exceeding £1bn, but we expect this to be extended to all schemes in the foreseeable future,” Champion said.

“And while [defined contribution] DC only accounts for 11.4% of fiduciary management mandates versus 88.6% of mandates which are DB schemes, the balance will shift in the future with significant implications for the fiduciary management market,” she added.

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