Trustee Action on Fiduciary Investment Management

There has been a huge amount of noise recently around how fiduciary management should operate, the inherent conflicts that sometimes exist and the levels of transparency around costs and performance in particular. On 12 December, the Competition and Markets Authority (CMA) published its final report setting out its conclusions and remedies.


The headline remedy from the CMA is that Trustees should put out fiduciary management services to competitive tender where more than 20% of scheme assets are delegated to a fiduciary manager. This makes sense, and represents good governance best practice, so it’s unsurprising that the Pensions Regulator (TPR) will have duties around monitoring compliance. But what other action should Trustees be taking when determining who to appoint and how to direct them?


Fiduciary management should not mean Trustees take their focus away from ensuring the investment strategy is consistent with a pension fund’s objectives. Indeed, Trustees need to be absolutely clear on how the fund’s investment strategy aligns to the funding strategy, the sponsor’s risk appetite and the fund’s end-game. This is likely to mean that the asset allocation will change over time and respond to changes in funding levels, bond yields, liquidity requirements as well as changes in risk:return characteristics of alternative asset classes (such as higher yielding credit and infrastructure assets). As such, the mandates to fiduciary managers, and indeed the fiduciary managers themselves will need to be regularly reviewed and adapted as needed.


The monitoring of performance, strategy and continuously changing mandate requirements means that trustee knowledge is crucial, and oversight of fiduciary managers must be maintained. Remember, fiduciary managers are being asked to perform within set parameters, and if those parameters become inappropriate, it is the Trustees’ duty to change them. Even if the parameters are related to a liability benchmark (which they are in many cases), Trustees should regularly ask themselves if the measure is still appropriate (e.g. versus the end-game). Ensuring they understand the performance measures and are able to assess whether they are receiving good value for money for the service can also be surprisingly challenging for Trustees.


In terms of trends for Trustees to note for 2019, there are at least three things that they should keep on top of:

  • There is around £140bn of UK defined benefit pension fund assets currently being managed by a fiduciary manager. KPMG recently reported a slowdown in growth within the fiduciary management market. Now that the CMA have published their remedies, growth will probably very quickly pick up again. This means that third parties will have access to a very rich source of recent information to help trustees appoint the right fiduciary manager when they go out to tender.


  • New providers have come into the market and this trend will likely continue in to the near future. These new entrants are likely to have advantages in particular situations. When going to market, go broadly including the newer players and ask about their differentiators, strengths and specialisms to understand how the providers fit with the fund’s current and future funding and investment strategy.


  • The Department of Work and Pensions (DWP)’s consultation on Trustees’ duties when it comes to Environmental, Social and corporate Governance (ESG) will very likely trigger rapid developments in this area and trustees should look ahead of the curve when tendering for fiduciary managers, so as to future proof appointments. There are a number of ways to approach ESG and it need not be a major constraint on a manager’s approach or likely returns, but managers who can show they are really thinking (and acting) in this area are likely to be in a good position as regulation and the market develops.