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How can fiduciary management help pension schemes?

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Time is precious, and time is money.

Investments are becoming more complex and with regulatory reporting requirements constantly changing and markets generally being more volatile, making investment decisions is taking up far more governance budget. This has further escalated with the Coronavirus crisis.
Pension Schemes have come face-to-face with falling equity markets, collateral calls and new investment opportunities arising from market dislocations.

Corporate sponsors saw their pension scheme deficits widen at a time when free cash flow was needed to maintain working capital. There is a vast array of investment or de-risking products that claim to have low governance requirements; however, often, they can require giving up investment freedom and transparency or have high costs. This is where a Fiduciary Manager comes in.

Fiduciary Management is a form of delegated investment decision making wherein Fiduciary Managers partner with pension schemes to advise on scheme investments. They are responsible for the implementation of that advice. These relationships are often highly tailored and do not have to be “all or nothing”. A simple Fiduciary Management partnership could involve a Fiduciary Manager from managing a fund-of-hedge-fund portfolio to a more comprehensive collaboration where s/he uses their investment expertise to make investment decisions on the entire scheme portfolio.

In practice, these partnerships can take many different forms, and the best relationships are often customised, be it in the services received, the portion of the assets covered or the decisions that are delegated. Every pension scheme is different and in practice will choose to partner with a Fiduciary Manager for various reasons.
Some of the benefits of partnering with a Fiduciary Manager are:

Independent investment expertise
A Fiduciary Manager has deep investment experience in a broad set of asset classes that a pension scheme can outsource without the cost of building an in-house team. Independence can be very important as a Fiduciary Manager that has no association with the underlying managers that a pension scheme invests with, can make investment decisions with minimal conflicts of interest. An experienced Fiduciary Management team with years of working together may offer superior investment insights.

As regulatory requirements have increased, pension schemes are increasingly being asked to monitor their investment decisions with more scrutiny. The regulation requires them to consider ESG factors in their investment decisions and understand the performance of their investments in detail, including the impact of explicit and implicit transaction costs. Good Fiduciary Managers typically have proprietary tools and systems that facilitate better performance and risk measurement and regularly adapt their investment decision making processes to account for them, making compliance much easier.

Precision and speed
As highlighted by the market impact following the Covid-19 pandemic, pension schemes need to be able to implement their investment decisions with speed and precision. Markets move everyday, and investment opportunities can often arise and pass more quickly than a typical pension scheme
governance structure can tolerate. Fiduciary Managers monitor their client portfolios daily and can act quickly to take advantage of investment opportunities or rebalance the portfolio as markets move.

Limited resources
Most companies do not have dedicated pensions treasury teams and have limited internal resources with limited time to spend on both investment and non-investment related matters. Partnering with a Fiduciary Manager can supplement any existing governance structure by re-focusing pension scheme resources on more strategic matters.

Pension schemes typically receive advice from investment consultants who do a good job of advising on strategic matters but are ultimately not accountable for the performance and the outcome of that advice. Fiduciary Management solutions typically focus on liability-relative scheme performance and are governed by the GIPS Fiduciary Management Performance Standard, to ensure consistency in performance measurement.

Value for money
Fiduciary Management relationships are often all-encompassing and typically cover all investment-related matters for the pension scheme. Through economies of scale, Fiduciary Managers negotiate more favourable asset management fees on behalf of pension schemes. The combination of investment expertise and accountability under a single Fiduciary Management solution is expected to deliver better funding and performance outcomes which ultimately offers better value for money. It’s worth remembering that cheap can be expensive. Solutions touting cheaper Fiduciary Management fees may be lower in quality and managed by individuals who lack pensions investment management experience.

Why choose now?
Fiduciary Management, as an investment solution is arguably more relevant today than historically. The recent crisis has highlighted the need for an investment partner who can help manage the downside risks associated with investing in equities, manage the collateral behind important hedges and take advantage of market dislocations. A Fiduciary Management partner could have helped better navigate the volatility.

As corporate sponsors begin to consider the “End Game” for their DB pension scheme, they are increasingly faced with the dilemma of entering low-governance investment solutions that may be poorly constructed or paying an insurance premium to “Buy-out” the scheme.

For corporates who prefer to avoid a large cash lump sum payment for insurance-based buyouts, a Fiduciary Manager can offer an alternative solution to reaching the required funding level for such a transaction to take place. By slowly growing the asset base while carefully managing risks, pension schemes can become buy-out ready, allowing their sponsors to reinvest free cash flow in existing or new business lines.

Partnering with a Fiduciary Manager today could give pension schemes the tools to better manage the next crisis and offer more flexibility in reaching the desired End Game.

Devan Nathwani, Investment Strategist at SECOR Asset Management