Why use fiduciary management when close to endgame for smaller schemes?

Since joining the Fiduciary Management team at Charles Stanley, one question keeps popping up from trustees and consultants – why bother with fiduciary management when a pension scheme is nearing its endgame, like buyout? It’s a fair question, especially given the perception of higher costs and the seemingly straightforward strategies involved at that stage. But having spent years in the advisory world, I’ve seen some real advantages to the fiduciary model – particularly for smaller schemes – that are worth talking about.

Ongoing monitoring and flexibility matter more than ever

Let’s start with the idea of maintaining the funding position. Most DB schemes have seen their funding levels improve recently thanks to rising gilt yields. So the focus has shifted from plugging deficits to protecting what’s already there. Sounds simple, right? Not quite. There are still risks like mismatches in funding levels between advisors, inaccuracies in hedging, and changes in membership that can throw things off. 

Fiduciary managers tend to monitor funding levels daily, which means they can spot opportunities to de-risk or re-risk quickly, or even identify when a scheme is ready for buyout. At Charles Stanley, we also do monthly hedge monitoring. For example, back in April, we noticed inflation hedges were drifting from target after Trump’s “Liberation Day” shook things up and made changes as a result. 

Sure, advisory models might offer similar monitoring, but smaller schemes often face budget constraints that limit how much they can do, which means this level of monitoring is often left out. And, following a sustained period of higher interest rates, we’ve seen a recent pick up in transfer values – something that can significantly affect liability cashflows for smaller schemes. Quick adjustments to hedging are crucial here, and fiduciary managers can usually make those changes automatically. Other models might be able to do this too, but they often involve multi-step processes that slow things down.

Improved funding positions have also opened up new opportunities for trustees and sponsors, even in smaller schemes. Our webinar earlier this year explored options like running on. While the recent Pension Schemes Bill didn’t offer major incentives for this, some sponsors – especially in sectors like charities – might find it beneficial to generate income from their DB schemes. But circumstances can change fast. Maybe sponsor capital becomes available, or accounting benefits make buyout more attractive. Or maybe insurer pricing suddenly improves, which we’ve seen happen this year. In these moments, having a governance model that allows trustees and sponsors to act quickly is key. Flexibility matters too. A fiduciary manager with an open-architecture approach, like Charles Stanley, can help schemes stay nimble and responsive, and invest in a similar fashion to insurer price-locks. 

Navigating regulatory pressures and governance challenges

DB schemes have been hit with a wave of new regulations lately – the General Code of Practice, DB Funding Code, and ESG reporting requirements, to name a few. At the same time, we’re seeing more sole trustee appointments and smaller trustee boards, especially in smaller schemes. That means less time for trustees to make investment decisions, even though short-term strategy changes can be beneficial. A fiduciary model can ease that governance burden significantly.

Debunking costs and complexity myths

Now, let’s tackle the common criticisms – cost and complexity. It’s true that fiduciary management has historically been more expensive – especially for smaller schemes. But with lower assets under management, inflation-linked advisory fees, and increasing governance demands, that gap is narrowing. Costs should be weighed against the value fiduciary management brings, and comparisons should be made on a like-for-like basis. There’s no point comparing an advisory model that reviews hedging every three years with a fiduciary manager that does it monthly.

As for complexity, some argue that fiduciary strategies are too intricate or illiquid for schemes close to endgame. Having worked with various fiduciary managers, I’ve seen some questionable strategies, but most are now very aware of liquidity issues post-gilts crisis and align closely with scheme objectives. Just because a scheme is nearing the finish line doesn’t mean we should abandon innovation. With investment-grade credit spreads at historic lows, we should be asking: what other contractual assets can offer better income with similar level of security? Can we tailor strategies to specific insurers from the outset instead of relying on broad market estimates?

The bottom line

So, to answer the original question - yes, fiduciary management still holds value, even for smaller schemes approaching endgame. The market continues to grow, and active management can help maintain funding positions, seize opportunities, and support trustees with the increasing governance demands. Of course, it’s not the right fit for every scheme. If budgets are tight or trustees want to stay hands-on with investment decisions, it might not be the best route. In those cases, bringing in an independent expert to help choose the right governance model makes sense. Just make sure costs are compared properly, like-for-like, so you’re getting a fair picture.