In the last part of this Q&A series, PP speaks to GSAM's head of UK & Ireland institutional client business, David Curtis, about his views on the CMA's review into the investment consultant and fiduciary management markets, and the results of our joint research project which looked at what trustees made of the same investigation.
PP: What are your thoughts on the timing of the Competition and Markets Authority's (CMA's) review? Do you think there was a need for it?
Curtis: Yes, I think there was, and the findings of the review tell you all you need to know about whether it was necessary. For example, the incumbency advantage for investment consultants who offer fiduciary management, the lack of comparable information on the fees, the lack of information on performance, and the difficulty of assessing the proposition. I believe these findings are very self-justifying of the need for the review.
Another observation we had and one that our survey really sheds some light on was the need for an objective look at this area. Some 78% of pension scheme trustees had their own investment consultant as the source of information on the CMA remedy (see figure 1). Therefore, we think the need for something independent was, again, justified.
PP: Respondents were vocal in their concerns over the lack of clarity on fees and investment performance. To what extent do you think that the industry has a transparency problem?
Curtis: People are now looking at fiduciary management alongside asset management and they're recognising that the transparency requirements which are applicable to both shed more light on asset management than on fiduciary management when assessing competing providers.
The traditional asset management industry has a much deeper history in the market and existing transparency requirements are geared towards and understood better in the context of that activity. Fiduciary management, which is a version of asset management and regulated in the same way, is subject to the same requirements, but needs the additional bespoke transparency requirements which the CMA is now introducing in order that trustees have the right tools to make their selection decisions.
PP: Our survey revealed that 45% of schemes who currently use fiduciary management, are buying it from their scheme's existing consultant. Do you think that trustees are doing enough in terms of scrutinising their investment consultants?
Curtis: Trustees do a great job given their position. Part of the CMA review highlighted that schemes that weren't competitively tendered were paying 25% more in fees than those that had gone through an open process. Therefore, it's really about how much perspective trustees have on the choices that they make. Once you're inside a process and listening to an investment consultant, as 78% of them have been, you might think there's a fit or a need that's being satisfied. However, unless you pursue an open tender process, which is a major strategic choice, the trustee risks not having as much insight or achieving as good an outcome.
PP: What do you think the CMA has got right with its proposals and what do you think it's got wrong or could have done better?
Curtis: Our view is that the CMA got this 100% right. There were some major conflicts in the way fiduciary management services were being acquired and they've addressed those conflicts head-on through a mandatory and retrospective tendering process, which we believe is positive step forward for the industry.
Additionally, it highlighted the need for transparency in regard to fees and performance, and for increased competition. In a market that has a lot to offer pension schemes and trustees, we see greater benefit in having more providers working on a level playing field to maximise suitability.
In terms of what could have been done better, and maybe it's not the role of the CMA, but the review could have gone further in mentioning the use of skilled third party evaluators to assess suitability of fiduciary managers for trustee schemes.
We're strong advocates of the need to get suitable advice when making significant choices. The CMA didn't specifically stipulate the importance of using third party evaluators for tendering or oversight, but it would've been good to see that incorporated into the remedies proposed. It doesn't matter what service you acquire, we believe there's a need to be supported with oversight of that service, and there are a range of providers who can offer this oversight - namely some of the third party evaluators and more broadly investment consultants.
PP: Half of trustees in our survey felt that there wasn't enough information out there to enable them to make that decision as to whether fiduciary management would be a benefit to their scheme and whether it was something that they should pursue. What do you think the industry can do to help demystify fiduciary management for those schemes who are just starting out on the path?
Curtis: This result initially surprised us. There's a wealth of information out there in terms of the benefits of fiduciary management. However, thinking about it a little more, it could be because the investment consultants have dominated offering these services, which means that trustees aren't seeing enough differentiation and understanding the benefits of fiduciary management for their schemes. We think you need to take time to consider new models and the key to understanding where fiduciary management can benefit you is talking to a range of different providers.
We believe that fiduciary management is very much an investment management offering and by engaging with fiduciary managers on an educational basis, to enable you to make comparisons to what you might already be getting from your investment consultants, the benefit of the fiduciary offering will really start to shine through. As well as speaking to fiduciary managers who are different to existing providers, the third party evaluators can also really help educate trustees and make them more aware of the fiduciary management offering.
So over time, we do expect a greater number of people to become comfortable with fiduciary management; we've certainly seen a great deal of activity right now. We also suspect most schemes will consider fiduciary management as part of any ongoing review of their governance.
PP: With the DWP having formally approved the CMA's remedies, how do you see the future panning out for the industry?
David: We believe this review has been a really beneficial experience and will drive greater adoption of fiduciary management for UK pension schemes. It increases the attraction of fiduciary management services, because it introduces a greater degree of competition and through that people make better choices and have a deeper understanding of the services that they choose.
We see a strong emphasis on improving standards. By improving standards, again, schemes will have better outcomes as they work with fiduciary managers towards the challenges which are ultimately paying pensions.
Finally, in terms of the future, we believe that increasing competition will reduce costs - resulting in more competitive fees. In terms of competition increasing, surely that will spur fiduciary managers to offer the most attractive fees that they can to pension schemes.
This interview was conducted as part of a major Professional Pensions research project on compulsory fiduciary management retendering, conducted in partnership with Goldman Sachs Asset Management. If you'd like to receive a copy of this report, please click here to register.