Most UK defined benefit (DB) schemes using fiduciary management saw their fees for the service reduce, with this largely driven by high retender activity linked to an order from the country’s competition watchdog following a review of the market, according to Isio and its latest annual fiduciary management survey.
The rules issued by the Competition and Markets Authority (CMA) require competitive tenders for mandates which delegate investment decisions for 20% or more of scheme assets.
Existing mandates of that size awarded without a tender must be re-tendered within five years of their commencement. The first deadline for compliance was June this year.
Isio said the fee reduction its survey uncovered was especially prevalent for schemes with less than £250m (€292m) in assets. The consultancy said its data suggested that average indicative fees dropped by around £25,000 over the last year for this group. Schemes with assets over £1bn did not see their fees reduce and for schemes in the £500m-£1bn range fees were static.
The consultancy said its data showed the average fee for a “best idea”-type portfolio, based on a client with £500m in assets, reduced from 0.44% to 0.4% per annum. Average fees for ‘cost-effective’ portfolios, meanwhile, dropped by 0.01% to 0.25%.
The fee reduction comes despite many trustees deciding not to switch providers following completion of a retendering exercise, with at least 86% of schemes staying with their incumbent.
Where schemes stuck with their existing provider, most fee reductions were in the 6-10% range, according to the consultancy’s survey report. Not all incumbent wins spelled lower fees.
Isio said the reduction in fees may also have been influenced by a significant proportion of fiduciary manager selections and retenders being run by third party evaluators versus independent trustees or lay trustees (79%, 10%, and 11%, respectively). Last year 57% of schemes used a third party evaluator.
Retendering activity was substantial this past year. According to Isio’s survey, the number of proposals submitted by fiduciary managers for fully delegated mandates increased by 345% compared with the year before, with 547 retender exercises conducted.
“Against a backdrop of the CMA order and COVID-19, 2021 was always going to be an interesting year, but whether it’s had the outcome most expected is still up for debate,” said Paula Champion, head of fiduciary oversight at Isio.
“It’s clear the retendering process has had a positive impact on the sector, with greater engagement and innovation from fiduciary managers, but the number of schemes staying with their incumbent but for a lower fee is perhaps not the outcome the CMA expected back in 2019.”
She added: “The market volatility caused by the pandemic has arguably encouraged many to stick with the familiar but it’s clear clients have used the process to ensure they are getting better value for money, which can only be a good thing.”
The survey results are based on the responses from 16 fiduciary managers operating in the UK DB pensions market and the data was collected up until 30 June 2021.
For briefings about the UK and Dutch fiduciary markets, see the November issue of IPE magazine