Rory Murphy, chair of the trustee board of the UK’s Merchant Navy Officers Pension Fund, says the success of fiduciary management depends equally on managers and trustees
• The MNOPF is arguing that trustees should take greater responsibility in relation to fiduciary management.
• The relative newness of the fiduciary management industry makes it difficult to select managers.
• The MNOPF chairman says the Financial Conduct Authority’s report is insightful.
The debate surrounding fiduciary management in the UK and beyond calls into question the role of trustees as well as that of managers themselves. The recent study of the market by the Financial Conduct Authority (FCA), the UK regulator, focused on the shortcomings of managers. However, it is common to hear, from trustees themselves, the view that more emphasis should be placed on trustees’ responsibility.
Rory Murphy, chair of trustees at the UK’s Merchant Navy Officers Pension Fund (MNOPF), reacted to the report highlighting the need for trustees to take ownership. He said: “I would urge trustees to step up and play their part.
“Responsibility for failure certainly lies partly with managers and advisers. But investors in general, and pension fund trustees in particular, must also take some of that responsibility,” he says. “The key is for the asset management industry’s clients to ensure they are identifying and demanding best practice, as we have done. And if necessary to vote with their feet.”
According to Murphy, there are enough examples of managers and advisers that are delivering value for money. Such examples show that when trustees exert sufficient pressure, the inherent weaknesses of investment advice and fiduciary management models can be resolved.
The scheme, which has £3bn (€3.5bn) in AUM, chose fiduciary management as the preferred governance model in 2011, appointing Willis Towers Watson as its delegated CIO.
“In 2008 the fund had a significant deficit. Something clearly had to be done. The far-sighted board, which I was not part of at the time, decided they needed to look at what the alternatives were.”
Murphy suggests his pension scheme is among those that have benefited from fiduciary management, thanks to the efforts of both the manager and the scheme’s trustees.
Among the UK schemes of a similar size to MNOPF’s, most are probably managing things themselves. Fiduciary management tends to be more popular among smaller schemes. MNOPF’s size would generally not be seen as a barrier to retaining more direct responsibility for investment decisions.
However, Murphy says: “We needed professional decision-making and execution, in the same way that larger funds do, but of course we weren’t big enough to get that kind of support. By going with a fiduciary manager, we were able to get access to top-drawer managers.”
Despite entrusting an external organisation with important investment decisions, MNOPF’s trustee board has always been in full control of the situation, according to Murphy. “One of the fallacies about fiduciary management is that if you delegate investment decisions you somehow lose control. I would say it’s actually quite the opposite, you have more control and the whole board happens to gain more responsibility. This is because instead of the investments being handled by a small sub-committee, the whole of the board is involved in dealing with the fiduciary manager and understanding what’s happened to the portfolio,” says Murphy.
The fiduciary management industry is still young, with a relatively limited number of managers that are still developing their offerings. This makes selecting a fiduciary manager particularly complex.
Many pension schemes have avoided dealing with this complexity by appointing their existing consultant as fiduciary manager, under the advice of the consultants themselves. The FCA is taking aim at this practice, which is seen as highly controversial.
When selecting a manager, following best practice is critically important, which is why MNOPF carried out a full tender process. “It was very open, very transparent. Willis Towers Watson was our actuary and investment consultant, as it happens. But it was by no means certain that they would get the role”, says Murphy.
He adds: “We were aware of the potential conflict of interest, and continue to be acutely aware of issues of conflict of interest with our advisers. We are able manage those issues, being a very mature fund.”
Having appointed the fiduciary manager, the trustees’ work was by no means complete. The scheme, says Murphy, continues to work on improving its governance model. “Because we have a delegated CIO, we get access to a better range of investment strategies. That allows the board to excel in good governance and seek continuous improvement in governance. The delegated CIO has allowed the board to be more strategic. But we are not there yet.”
De-risking activity is one example of how the scheme retains responsibility in relation to the fiduciary manager. Murphy explains that while the delegated CIO is responsible for looking out for de-risking opportunities, the decision rests with the trustee board. Between 2009 and 2015, the scheme carried out a series of buy-ins and buyouts of the liabilities, as well as building a longevity hedge.
Access to innovative investment strategies and de-risking opportunities has led to better funding and risk reduction for MNOPF. The Gilts-based funding level was 83% at the end of 31 March, rising to 85.2% after the end of the quarter thanks to deficit contributions.
Murphy says: “The improved governance model means the pension fund is less dependant on the 350-plus participating employers. Since the appointment of the delegated CIO, we managed to save over £500m (€553m) in employer contributions. Not only we are helping the pension fund, we are also helping a critical industry for the UK.”
“We needed professional decision-making and execution, in the same way that larger funds do, but of course we weren’t big enough to get that kind of support. By going with a fiduciary manager, we were able to get access to top-drawer managers”
The fiduciary manager is rewarded through a base fee plus a performance fee, which is measured against the scheme’s journey plan. Their overall performance is monitored by the trustees with the help of the other consultants. The scheme has retained Hymans Robertson as adviser. “Managing the scheme is a combined piece of work. The trustees have the ultimate say on all decisions, but they are part of a team. It is important that all the advisers blend and work together,” says Murphy.
The chairman emphasises that for this model to work, trustees need to be fully engaged and willing to learn.
Murphy explains: “As trustees, we don’t make any decision until we have the proper training, and we are all absolutely clear that we understand the issue, and the consequences of the decision that we are about to make. But I will stress, it’s the trustee that makes the strategic decisions, not the fiduciary manager.
“It takes hard work, it doesn’t just happen by magic. It takes advisers, the board and the executives being responsive to what’s happening in the world, being innovative, and looking for imaginative solutions to the problems we face.”
This is why, he argues, trustees in general should focus on improving their own governance capabilities. It is work that pays off, and significantly reduces the risk of providers delivering a sub-optimal service.
Murphy says: “It is up to us to negotiate the right deal and the right price, and it is up to us to monitor that deal. If it goes wrong, we need to look carefully at the origins of what went wrong and why, but we can’t always blame those who are providing the service.”
Murphy says the FCA’s work on fiduciary management is “insightful”. If anything, it should be a wake-up call to trustees, not just on the flaws of fiduciary managers, but also on their responsibility to make it work.