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Fiduciary news

The final word

It’s the end of a 15-month review into the fiduciary management industry – and the result is good news for pension schemes.

by
Bob Campion

in Fiduciary news

13.12.2018

Ahead of schedule, well organised and warmly welcomed: no it’s not Britain’s dilapidated rail system it is the Competition and Markets Authority’s (CMA) final word in their Investment Consultant Market Investigation.

In a 440 page report (found here) the CMA has set out what they expect from investment consultants and fiduciary managers going forward, much of which was trailed in their preliminary report and is broadly good news for pension schemes.

Taking a refreshingly common sense approach, the CMA has taken up the mantle of the trustees’ champion and set stringent but fair requirements for schemes and providers to follow.

Following a tender process

This really wasn’t rocket science, but the CMA has come to the inevitable conclusion that any scheme appointing a fiduciary manager should tender for the contract with at least three firms. Their motivation behind this is the surprising number of schemes which have appointed their own investment consulting provider as fiduciary manager without considering other options. The CMA cites this “incumbency advantage” as one of their main concerns, explaining that “This means that some customers remain with the firm that is their investment consultant even if a better deal on fiduciary management is available elsewhere.”

As well as preventing this practice in future, all fiduciary mandates appointed without a tender will have to be re-tendered over the next five years. With 862 mandates currently live according to KPMG at their last count and the majority falling into the ‘no tender’ category there is going to be a considerable amount of tendering to come over the next few years.

Fortunately the Pensions Regulator is being called on to help trustees with tender templates and practical guidance. But many trustees will want some more structured support, either from a professional trustee or independent consulting firm.

Know your fees

Cost and fees in investment management are complicated, which is why the Financial Conduct Authority (FCA) is running a project to establish a common reporting format. Fiduciary managers and investment consultants will be expected to follow this template so that trustees can understand exactly what they are paying for. Most fiduciary managers already do this, but not necessarily in the same way – the CMA establishes a much-needed consistent process.

Measuring performance

Illustrating past performance is complicated for fiduciary managers. As a result firms have largely taken a different approach to each other, making it very difficult (if not impossible) for prospective client to compare managers. That problem should be swept away by a new reporting standard that is very likely to be the one established by consulting firm IC Select. Most fiduciary managers like Charles Stanley have already started implementing this which is just as well as it has to be used within six months!

Charles Stanley’s view

Whilst not unexpected, the CMA’s final report is a welcome conclusion to their investigation, which has been surprisingly swift and comprehensive. Now it is done, the project should serve to bolster confidence in the fiduciary management and consulting industries that are vital to defined benefit pension schemes. Like all new sets of rules they won’t please everyone and the details will need to be clarified quickly – such as the small print on performance and cost reporting.

Given that many of the recommendations were heavily trailed and broadly common sense, Charles Stanley along with many of the organisations operating in this sector had already implemented many of their recommendations. Indeed, our fiduciary management team has gone much further, particularly in the area of client performance reporting.

To make the new regime work effectively, however, more detail and support is needed quickly.

Smaller schemes with less access to professional support may worry at the thought of enforced tendering, which is why it is vital that the Pensions Regulator moves quickly to provide the support that many schemes are going to need.

The CMA has shown that complex projects can be achieved quickly without cutting corners. There is no reason why TPR, FCA and other organisations involved in dotting and I’s and crossing the T’s can’t do so swiftly. With that done over the next few months, schemes and providers can look forward to a more healthy, transparent and productive industry.

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