Fiduciary management is at the heart of an ongoing debate taking place in board rooms and investment firms all over Europe. Is it time to re-think the whole concept? Pension Funds Insider recently (10 March 2011) asked two authors from KPMG on a report on the service, as to why its popularity seems to be diminishing in the Netherlands

How does an agreement based on trust work? This is a question now frequently put to trustees in the Netherlands, as they re-think their use of fiduciary managers.

For years they have relied on fiduciary managers providing their pension funds with services ranging from asset management, administration, and risk management to actuarial services and distribution. The cooperation between the two parties was based on trust and dependability.

But trustee boards are now starting to see that this reliance may have become a problem.  As the financial crisis whizzed past them, some discovered that had no knowledge of the investments their funds made, the money they had invested in US securities, in Spanish infrastructure or Irish property. They had no knowledge of the risks involved. The crisis walked straight into their schemes, and stripped their assets on its way out.

"Board members used to respond to questions saying 'oh we don't know, our fiduciary manager does all that', and that is not a good reply when it comes to risk management," says Tim Barlage, an advisor at KPMG. "The board should know what the risks are, what the consequences can be and whether or not they are in line with the mandate. If they can not answer these questions then they have not acted adequately."

Together with advisor Jeroen Ruepert, Barlage recently wrote Integral management; more than just a makeover of fiduciary management which looks at the current shift from fiduciary management towards integral management, also known as integrated asset management, in the Netherlands.

The report criticizes trustees for not being aware of the risks that were taken with their members' money and recommends a new approach to handing over fiduciary responsibilities.

Ruepert and Barlage say in their report that the very expression, fiduciary management, has been, as they call it, 'contaminated'.

"We recommend doing away with the word fiduciary. Trust does not form a good base. By giving the service another name people will be forced to think about this," says Barlage." 

"The basic principle of fiduciary or integral managers is that they take over the tasks and give you the support you need," adds Ruepert. "At KPMG we see that pension schemes still need this, regardless of what you might read. We do not feel that the whole system does not work, it just has to be approached differently now."

The market seems to have picked up on this and many companies have started using the term integral management instead. The general consensus seems to be that the term does not imply that trust alone is a good foundation for cooperation and is more neutral.

PGGM is one of them. Its Chief Executive Officer Else Bos said last year that she preferred the use of the word integral management because of the increasingly high demands that have been made of pension scheme boards. She says integral management is a more neutral and clearer defined term that will not lead to as much confusion.

Harmen Geers, spokesperson for APG, the asset manager who manages the Netherlands' largest pension scheme ABP, says: "We definitely made a conscious choice to use integral management instead of fiduciary management. It has had different definitions in the past couple of years. We wanted to be clear and show the complete set of integrated services we offer, as opposed to the more liability free fiduciary services."

Trust, says Ruepert, is an important component in the relationship between board and manager. As a pension fund you should select your parties in a way that you can trust them but it is not just that. What we are saying now is 'all is well with your trust but that is absolutely no solid ground for good financial management."

Ruepert and Barlage explain that, though this sounds evident, a lot of pension schemes agreed a mandate with their manager that was far too loose. Managers had a lot of freedom in the choices they made and some of these choices should not have been theirs in the first place to make.

"You need to change the whole process which starts with the mandate, "says Barlage. "If you give a loosely formulated mandate with lots of space for active management it will go wrong, guaranteed."

"Even if the mandate is clear you still need to carry out checks periodically. You are responsible for the risk and the managers have to carry out their duties in such a way that you can carry out the management of the risk."

The Dutch governing bodies DNB and AFM have taken on some of the recommendations made by KPMG and now send out the same signal; the final responsibility still lies with the scheme's trustees.

"Everything starts with strategic management; not just bordering risks but also how, for example, management selection and management monitoring should be carried out, which brokers to work with, with derivatives can be traded, how the administration should be carried out, the reports, the format, the depth, all of that has to be decided in the beginning," says Barlage.
 
"In every mandate you agree you are the one to keep the overview, that is even a legal requirement. You have to give your permission to everything that is being done and published, internal and external.

"You can still outsource, but the responsibility – the final responsibility – that you can never outsource."

The advisors say the system is still viable but needs to be adjusted. "A simple 'I'll trust you' is no longer enough, trustees need to be more assertive and an approach which says 'show & prove me' is needed," they write in their report.
 
Barlage stresses that they are criticising asset managers or their offerings, after all they are only answering to demand. The fault, they say, lays with the pension funds "because they set the mandate."

azeevalkink@wilmington.co.uk