When purchasing professional services, choice is good. Differentiated choice is even better.
The ongoing transformation among firms of professional trustees will further differentiate their propositions. That’s a good thing for the schemes and sponsors who rely on professional trustees’ experience and expertise.
Isio’s excellent 2023 survey of professional trustees describes a sector that’s growing, despite scheme mergers, wind-ups and settlement transactions.
That growth should continue apace because demand is hardly saturated: less than half (43%) of UK defined benefit schemes have appointed a professional trustee. Meanwhile, the jobs of scheme governance, investment and risk management are becoming more multi-faceted, driving schemes and corporate sponsors to appoint professional trustees to help steward them towards their desired endgames.
The Pensions Regulator has issued eight communications in the first four months of this year, including guidance requiring trustees’ attention.
That growth will come with change and differentiation.
While there have always been differences among the professional trustee firms, our experience is that selecting a professional trustee has often come down to the person: their experience, expertise and performance on the day. Diversity now features prominently among selection criteria.
While the individual trustee will and must remain an important part of selection decisions, we’re seeing real divergence in business models and commercial propositions driven in part by consolidation and changes in ownership.
Many professional trustee firms are offering adjacent services like secretarial and governance support. Some firms which have always shared best practice internally are starting to standardise and centralise some decisions for their clients unless scheme- or sponsor-specific considerations genuinely require a unique approach.
Some are in-sourcing investment implementation and covenant and actuarial expertise. Some are using financial technology to offer real time information across a trustee’s schemes e.g. an alert if a scheme approaches a liability-driven investment (LDI) hedging trigger. Others are exploring the bulk purchase of some services so their clients benefit from the firm’s growing scale.
There’s been heavy focus on small scheme and sole trustee propositions, often involving fund platforms or fiduciary management, but there are material differences in each firm’s approach.
We’re working with some to help them customise their offerings e.g. fiduciary management with or without light-touch covenant advice, model growth portfolios targeting different returns, segregated LDI for smaller schemes who had bad experiences of pooled funds amid last year’s Gilts crisis, etc.
Over time, these differences in approach and proposition could lead to differentiated outcomes for schemes and sponsors, particularly where there is a sole trustee in place. And this could facilitate the type of performance comparison trustees and their advisers use when selecting fund managers.
There is no single approach to professional trusteeship that’s ’best’ for every scheme and sponsor, so there’s plenty of scope for change, differentiation and choice.
We’re observing and participating in these innovations. We welcome them and the important role professional trustee firms have to play for defined benefit and defined contribution schemes and other institutions in need of skilled governance.
Patrick Cunningham is partner and co-head of clients at Cardano
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