As The Pensions Regulator’s consultation on investment governance guidance closes, Holly Roach looks at the industry’s response.
The Pensions Regulator (TPR) has been seeking views of pension trustees and advisers on four draft guides to support tougher investment governance rules in a consultation that closed on 11 September.
The consultation on the draft guides came in response to the Competition and Markets Authority's (CMA) recommendation to TPR to produce guidance for trustees of occupational pension schemes on engaging with investment consultants and fiduciary managers.
The CMA has introduced new duties for trustees and managers of occupational pension schemes, which will take effect from 10 December 2019. It recommended TPR produce guidance on these duties in its final report, which was published in December 2018.
The new duties will legally require trustees to run competitive tender processes to recruit fiduciary managers if their schemes use such arrangements for at least 20% of their funds. This requirement will also apply to existing arrangements that have not been made as a result of a competitive tender, according to the regulator.
Trustees will also be required to set strategic objectives for those providing them with investment advice, so that they can measure whether the service is good value for money - something they have not previously been required to do.
The Department for Work and Pensions (DWP) is currently consulting on bringing these new duties into pensions legislation, after which TPR will be tasked with regulating compliance with the requirements.
The suite of guidance the regulator developed includes a draft guide to tendering for fiduciary management services, a draft guide to tendering for investment consultancy services, a draft guide to setting objectives for providers of investment consultancy services, and a draft guide to choosing an investment governance model. This guidance went out to consultation on 31 July.
A common theme among responses was that the guidance is appropriate to support trustees in meeting the new duties and engaging with their providers of investment consultancy and fiduciary management services.
The Pensions Management Institute (PMI) was largely supportive of the guidance - noting it was satisfied that the language used in the guidance was "suitably clear" and that the "principles set out are proportionate and appropriate for any trustee board conducting a tender exercise". The professional body did not believe there were any areas of a competitive tender process missing.
In its response, the PMI stated it would be helpful to have differentiated "between a scheme who was making the decision between the traditional model with an investment consultant and whether to go down the fiduciary management route. The procurement part begins once that decision is made. This is not quite clear".
It also agreed there were no features missing in the guidance to support trustees in deciding on a suitable model for their scheme.
Barnett Waddingham principal and head of fiduciary management evaluate Peter Daniels agrees he is "generally supportive" of the guidance but noted there are some aspects which "need to be addressed to provide more clarity to the industry".
He adds: "The consultation process is the ideal means of ironing out these wrinkles and we hope that the regulator will take on board our suggestions.
"The regulator has had a tricky job preparing its guidance based on draft legislation from the DWP, which itself needs tightening up a little in our view."
The PLSA was also largely supportive of the guidance. The trade body's response said: "We believe that generally, the guidance is clear and well-written. We particularly note the draft scoreboards and templates - both of which are considered to be useful approaches by scheme trustees."
Investment and stewardship policy lead Caroline Escott says the trade body "supported the principles behind the CMA remedies for trustees".
She adds: "We believe it is good practice for schemes to undertake meaningful consideration of how their consultants have helped them achieve their goals, as well as to explore the broader market for fiduciary management services prior to choosing a provider."
However, there is some concern among the industry as to whether the language used in the guidance is appropriate and whether the guidance overall has the correct focus.
Daniels says he was "pleasantly surprised" that the regulator decided to provide guidance on choosing an investment governance model. However, he notes Barnett Waddingham feels the regulator "got the emphasis wrong" in this particular guide.
"Framing the main options as either investment consultancy or fiduciary management gives excessive weighting to the latter, an approach followed by a relatively small proportion of the pensions market," he says.
He continues: "The focus of the guidance should be on what level of delegation is appropriate, not whether your asset manager should also be your investment consultant, which is essentially how the guidance is currently framed."
Despite this, Daniels says he was pleased with the regulator's guide to tendering for fiduciary management - noting it "demonstrates the complexities involved in trustees selecting the right provider and shines a light on the value which can be added by a third party evaluation firm".
He does, however, note the guidance "could do more to emphasise proportionality - there will be some cases caught by the mandatory re-tendering requirement where the ‘full works approach' is likely to be inappropriate".
The Society of Pension Professionals (SPP) also expressed some concerns around proportionality in its response to the consultation. As secretary John Mortimer notes: "The requirement for trustees to set strategic objectives for providers of investment consultancy services would be difficult for many schemes, which do not have specific trustee investment expertise.
"We agree that, while clear trustee oversight of advisers is important, the requirements of the CMA, DWP and the regulator's guidance appear very granular and prescriptive in places and may seem disproportionate, especially in the case of smaller schemes."
The SPP also argues some of the language used in the consultation is unclear and ambiguous. Its response says: "We have concerns over the comments regarding the possibility of advice from the scheme actuary falling under the definition of investment consultancy services.
"We note that high-level commentary from the scheme actuary with regard to the link between the investment approach and the scheme's funding objectives is explicitly excluded from the definition of investment consultancy services in the CMA Order."
It continued: "Our preferred approach would be for TPR to remove the suggestion that the scheme actuary might provide investment consultancy services."
Escott concludes that the PLSA would also like to see greater clarity around the applicability of this guidance to Local Government Pension Scheme funds - noting there should also be a greater acknowledgement of the role of investment consultants.
She says: "We also believe that TPR should explicitly acknowledge in its guidance the vital role that many investment consultants play in assessing and comparing costs and charges information for investment services."
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