If you had to choose a word, to sum up the current financial outlook, ‘uncertain’ would be a good fit. Inflation, the ongoing war in Ukraine and the resultant energy crisis are likely to affect economic and asset class performance over both the short and medium-term.
Investment uncertainty has significant knock-on effects for defined benefit (DB) pension schemes. Trustee boards, especially in smaller schemes, may not have the knowledge, expertise and time needed to navigate choppy investment waters, while still focusing on their schemes’ long-term objectives.
Appointing a fiduciary manager to manage a pension scheme’s portfolio and make investment decisions on behalf of trustees can help to address the problem of limited time and expertise. In a fiduciary management collaboration, trustees remain responsible for their scheme’s overall investment beliefs but delegate portfolio design, long-term investment management and day-to-day decision-making to their fiduciary manager.
Fiduciary management works best for trustees who recognise that making investment decisions is not their core skill set.
For small and mid-sized schemes, in particular, a fiduciary manager can give them access to asset classes that they might not otherwise be able to consider or help them de-risk by offering strategies such as cashflow matching that they would not be able to implement themselves.
“Fiduciary management works best for trustees who recognise that making investment decisions is not their core skill set,” explains Bob Campion, Senior Portfolio Manager, Charles Stanley. “As with any task that requires technical expertise, it makes sense to hire specialists who are used to designing and managing investment portfolios for pension funds.”
Peter Daniels, Partner and Head of Fiduciary Management Evaluation at consultants Barnett Waddingham says that trustees need a clear picture of their scheme’s ultimate financial objectives before considering fiduciary management. “This will in turn drive the level of sophistication the investment strategy needs to achieve those objectives.”
“Fiduciary managers have the professionals, resources and tools needed to plan long-term investment strategies and deliver real results in a complex and fast-moving field,” explains Campion.
How to choose a fiduciary manager
Although all fiduciary managers offer broadly similar services, creating a shortlist of potential partners and selecting a provider that matches the scheme’s investment objectives requires careful trustee planning.
“Appointing a fiduciary manager is a big decision and it is likely to be a long-term relationship,” says Paula Champion, Partner and Head of Fiduciary Management Oversight of Isio. “There are a number of managers in the fiduciary management universe, and each one has slightly different approaches, strengths and potential weaknesses.”
“Be clear on your aims and preferences and select a provider shortlist that fits those,” advises Daniels. For example, trustees’ ultimate goal might be insurance buy-out, so choosing a fiduciary manager who can help them achieve that goal will be crucial. Factors such as investment preferences and cost will also determine how much of the scheme’s assets trustees delegate to their fiduciary manager.
“It's vital that there is a cultural fit and that trustees’ investment beliefs are aligned with those of the fiduciary manager. A good understanding of trustee beliefs at the outset can save potential issues in the future,” says Daniel Walsh, Partner and Head of Fiduciary Management Research at Isio.
Once trustees have drawn up a short-list of potential providers, some key areas to focus on in interviews are:
- What is the fiduciary manager’s approach to generating investment returns and managing risk?
- How do they make investment choices?
- Can the fiduciary manager demonstrate how they provide value consistently for other clients?
- Who will be on the proposed team, and how will they work with the trustees?
- How will the fiduciary manager make sure they understand the specific needs of your scheme?
“It is vitally important that trustees understand how decisions are made and the investments that are being chosen for them,” adds Campion. “Although trustees can delegate decision making to a fiduciary manager, they are always responsible for the outcome. There is no such thing as a stupid question – and trust your instincts; if something doesn’t make sense that’s because it hasn’t been explained properly or is just plain wrong.”
The right fiduciary management partnership can help pension schemes achieve their long-term objectives through more sophisticated investment management, better governance, a collaborative partnership and the confidence to face uncertain times.
Learn more about how Charles Stanley Fiduciary Management can support you with a sophisticated, long-term investment strategy.
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