UK - Pensions consulting firm Muse Advisory and law firm Wragge & Co have called on pension fund trustees to step up their due diligence when appointing fiduciary managers.

The firms questioned whether trustees should be legally obliged to go through a formal due diligence process when making big changes in investment approach, such as appointing a fiduciary manager.

Muse and Wragge both warned that a lack of due diligence could cause serious conflicts of interest and leave trustees exposed.

Director at Muse Advisory Mark Hodgkinson said: "Over the last few years, we've been surprised to see firms converting their traditional consultancy clients to fiduciary management with seemingly little due diligence on the part of the pension fund trustees.
"Trustees need to project forward four or five years and ask themselves what they will do if fiduciary management hasn't worked out the way they anticipated.

"Maybe it is time to question whether trustees should conduct a thorough due diligence process when outsourcing the implementation of their investment strategy to a fiduciary manager, implemented consultant or whatever else term they may use to describe their firm's service."

Paul Feathers, a partner in Wragge & Co's Pension team, added: "We have advised numerous trustees in relation to fiduciary management mandates. We share Muse's view that it is essential for trustees, when appointing a fiduciary manager, to undertake a much higher level of due diligence to discharge their obligations under the Pensions Act 1995. Trustees must ensure the appointed firm has the right level of knowledge, expertise and experience.

"The position is complicated because trustees frequently have to rely on consultancy advice in relation to such appointments from either the fiduciary manager itself or a related company. This raises a serious risk of conflicts."

He added: "Trustees must be able to demonstrate they have taken proportionate steps to manage any such conflict, which can often mean undertaking their own due diligence process.

"If trustees don't get their governance right at the outset, there is a risk they could find themselves personally liable further down the line if things don't work out as they expected."