The Pensions Regulator is increasingly turning up the heat when it comes to scheme governance, which is understandable given the past few years of economic turbulence and the amount of money involved. On top of that, scheme members need to be protected. So how can trustees ensure they adhere to all of these demands and still keep on top of the long term goals and day-to-day chores?

One solution, offered by more and more consultants, is fiduciary management, which is a concept that originated in the Netherlands and has seemed to gain a lot of momentum since it arrived in the UK. But many pension scheme managers still struggle with the concept. Pension Funds Insider tries to find out why - is it purely a matter of understanding the terminology or are they afraid of losing control?

Generally speaking fiduciary management involves the outsourcing of the day-to-day management of a pension scheme to a lead manager with a high degree of transparency, so that the manager's decisions can be easily scrutinised, and overall control is retained by the trustee board. This way trustees can focus their attention on key strategic issues and ensure the long term goals, which were set, are also followed.

The concept was developed by Anton van Nunen. The Dutchman, who now works as director of strategic pensions management at Syntrus Achmea, developed the idea of fiduciary management around ten years ago and his framework for 'a new way of consulting' still applies today. According to Van Nunen there are six tasks that a fiduciary manager has to fulfil in order to support the board of trustees: give advice, construct the investment portfolio, select the asset managers, monitor the portfolio, report, and educate, "Because the fund has to understand what a manager is doing."

Traditional versus Fiduciary

How is it different from traditional consulting? Van Nunen says the main difference is that they give their opinion on certain aspects of the pension problems, sometimes construct parts of the overall portfolio and select external managers, but by nature do not hang around long enough to deal with the real underlying issues facing pension schemes nowadays and miss this overall approach.

"If implemented in the right way, fiduciary management offers a pension scheme the potential for improving its governance and, ultimately, its funding ratio," Evantz Perodin, a senior investment consultant at Alexander Forbes, says. "It offers much better changes for trustees to monitor the ratio, of finding and exploiting opportunities as opposed to analysing it every three years during their valuation."

In the Netherlands it is common to hand over your whole portfolio, but in the UK fiduciary management can take many forms - from the outsourcing of a specialist segment of the portfolio - for example alternatives or distressed debt opportunities - to a full strategic partnership with a fiduciary manager.

A growing concept

This flexibility is not only seen in the way it is implemented but also in the naming of the product. While fiduciary management is generally accepted as the industry term, some providers use alternative terms. Aon Hewitt, for example, prefers the term delegated consulting and others use 'solvency management' or variations on the term 'implemented consulting'. Perodin says these terms could make a difference though when it comes to the reporting side of things. An implemented approach, for example, could mean a more involved role for the trustees and reporting back on changes 'in real time' for the manager.

One thing should remain clear though, as Andrew Stephens, head of BlackRock's UK core business, says: "What is an important thing to remember is that trustees retain ultimate fiduciary responsibility for the scheme so they need be comfortable with their manager, their investment approach and risk management processes, and ensure that they retain a sufficient level of control and transparency over the portfolio."

Mark Stanley, head of business development and client service for Mercer's UK investment management business, says the firm normally starts by offering a general consulting approach and tailors this on the clients' wishes from that point on. He says the concept is growing "quite nicely" and that growth is actually beginning to accelerate.

Stephens agrees, saying: "The concept is certainly increasing in popularity here. The most frequent conversation we have with clients today is around delegating responsibility to enable trustees to spend more time focussing on the overall scheme objectives. These delegation conversations cover topics ranging from allocations to diversified growth funds all the way to full investment delegation."

"It is down to a number of reasons," Stanley says. "The key reason is that things are starting to become more complex and trustees are getting increasingly worried about how they are getting through the de-risking process. They are beginning to realise they need more help and they need to act in a more business-like way, they need to have a process in place that allow them to react more quickly to changes in the market."

He explains that some pension schemes only come to seek advice on a small portion of their portfolio and for some schemes the firm provides advice on the whole portfolio. "It is not uncommon for a client to come to us and ask advice on a specific asset class. For example when it comes to emerging market debt or high yield, they will make up a relatively small part of their overall allocation but nonetheless schemes would like to diversify the investment over a number of managers. That involves significant governance and it would make sense then to bring in some additional expertise to see to that."

Reacting quickly to daily threats and opportunities

A customised approach seems to win momentum. Consultants such as Mercer and BlackRock monitor the funding levels of schemes on a daily basis and together with the scheme lay out targets and triggers so they can react quickly in the event of market developments.

BlackRock has developed this concept one step further now and entered the market with a new product; finding ways to work with the concept of fiduciary management but around the possible fears of 'stepping away from being in control' that some trustees have about it.

This week the firm launched its new offering entitled WayFinder, which is in effect a new de-risking solution to help defined benefit (DB) pension schemes achieve a state of full funding.

As said, BlackRock monitors the macro-environment on a daily basis and alters the risk accordingly. But alterations to the portfolio can also be made based on the changing needs from within the scheme, e.g. changes to their sponsoring company. As the firm covers investments in all major capital markets and has experience in multi-asset investing, liability driven investment and fiduciary management, it seeks to incorporate all of these aspects into this new all-inclusive solution.

It is a version of fiduciary management that works in conjunction with investment consultants with a simple approach. As is the case with solutions offered with some other providers, the strategic approach is set out up front. All the possible market conditions are calculated in and it is decided how the asset allocation would be changed in these circumstances. The tactical changes can then be made without re-occurring approval from the trustees. The main difference is, however, that a third party independent adviser works with the scheme to approve and enhance the proposed strategy, ensuring the best possible approach is indeed agreed upon between consultant and pension scheme.

Opponents could say that it is still not as independent as should be as they are not choosing from the 'best of breeds' but merely the best in-house solution. However, solutions like these do offer a more realistic chance of reaching the expected return and improved funding ratio due to the immediate reaction to changes in the macro environment. Many trustee boards are only able to meet infrequently, which when combined with increased complexity from a regulatory and market perspective, makes it more challenging to exploit opportunities. With, for example, issues like the U.S. debt crisis and the current turbulence in the Euro-zone, a quick reaction is required.

As Van Nunen stated in an earlier interview with Pension Funds Insider: "Most of the funds are being managed by hard-working and inspired people who nevertheless are hardly educated in the pension industry, with a huge responsibility and working long hours without decent pay in a field that isn't their main one." Bigger funds deal with the increasing demands by hiring more experienced staff, but for medium-sized and small schemes this is not an option. It seems that fiduciary management, in which ever form it comes, could provide an outcome for these trustees.

First published 29.06.2012

By Alexandra Zeevalkink azeevalkink@wilmington.co.uk 

Edited by Monique Simpson