“A much bigger deal than people think”
More and more UK pensions schemes have reassessed their management and governance models over the past few years. This has led many of them to move towards fiduciary management – and it’s a trend that is continuing to grow.
“My best guess is that, in five years, more than half of defined benefit [pension] assets will be run under some form of fiduciary management,” Chris Ford, global head of investment at consultancy Towers Watson, recently told the FT. “It is going to be a much bigger deal than people think.”
Why use fiduciary management?
When it’s done well, fiduciary management has the potential to improve a scheme’s governance, keep a close eye on investments, and make trustees’ lives easier. Here are some of its benefits:
• Monitor investments daily
Fiduciary managers will keep a close eye on asset and liability values every day, so they can make swift decisions on whether to lock in profit or remove risk.
• Trustees can focus on high-level issues
By outsourcing their scheme’s day-to-day management and operations, trustees can bring their attention back to key strategic issues, and long-term goals.
• Expertise on complex decision-making
With complicated derivative structures and mechanisms on the up, having an investment expert on hand can help bring trustees up to speed more easily.
• There are flexible options
Fiduciary management has many options – trustees can choose from a full partnership with a manager, to outsourcing one specialist area of the portfolio.
• Trustees retain control
The lead fiduciary manager should always offer a high level of transparency, so trustees can closely scrutinise their decisions and keep overall control.
And the reasons not to?
Fiduciary managers can be expensive, and the fee structures can be complex.
And while it might aim to ease the burden, some trustees may feel their overall investment portfolio has become more complicated in a fiduciary arrangement.
Another drawback for some trustees is feeling they may have less control by delegating important day-to-day tasks to a manager.
Choosing the right fiduciary manager
Trustees don’t need to be experts in every investment strategy to choose a manager. But there are many different types of management in the UK, with their own ways of working – which means trustees must spend time thinking about what they need before starting the search.
To
help you make the right decision, take a look at your own particular budget, risks, style and the result you want, suggests Lucas Vermeulen, UK Managing Director at Ortec Finance.
“This may take time, but it will save a great deal more time and cost in interviewing inappropriate managers, or making a misguided selection and trying to make something work that doesn't fit,” he cautions.
“The danger is bypassing the initial strategy stage and selecting the provider who has the best pitch on paper, only to then find they can't create a strategy that suits the nuances of the scheme,” he says.
And remember, says Vermeulen, that ultimately trustees are the ones with the power: “Trustees need to be prepared to make demands of potential advisors, and question the underlying reasoning for their advice.
“If an advisor can't agree to follow the path laid out and instead tries to show you their 'better way', then perhaps they aren't the one for you,” he says.
Written by Nikki Allen - pensions@wilmingtonplc.com
