In recent times, fiduciary management has begun to spread beyond its origins in the Netherlands to other DB markets. Andrew Sheen examines a growing phenomenon
But when it comes to defining what fiduciary management actually is, rather like liability driven investment there seems to be no 'set' dictionary definition all can agree upon; everyone has their own different take on what it constitutes and what it means for a fund.
For some, fiduciary management can mean a range of products aligned in the interests of the pension fund and overseen by a single manager, while for others it is a holistic, investment driven philosophy.
Dr. Anton van Nunen, an independent expert on the subject, author and head of consultancy firm Van Nunen & Partners, stated: "There is a lot of confusion over what constitutes fiduciary management."
For Van Nunen, fiduciary management is a combination of five factors - advice, portfolio construction, manager selection, monitoring and reporting - which he said were inter-linked facets of a whole and should be executed by one manager.
Garry Pieters, head of business development, ING/AZL, said that in his opinion, fiduciary management was made up of three central elements: advice, implementation (including manager selection) and control - again, implemented or overseen by one manager.
Of overriding importance and universally acknowledged in fiduciary management seems to be the ability for a single manager or small team of managers to take an overall view of the fund and tie all the disparate aspects together.
Dr Olaf Sleijpen, managing director, institutional clients at APG Group, the asset management arm of the €205bn (end of June 2008) ABP pension fund said: "We see it as somebody who manages the assets of the pension fund in an overall and integrated way. Not looking solely at asset mangers from one perspective, but also taking into account the risks, liabilities and obligations of the fund. It's about taking into account the nature of a pension fund as a different animal than any other type of institutional investor."
He added: "It's important that you can approach the investment and asset management sides together. It's about tying all the things together."
For Paul Trickett, European head of investment consulting at Watson Wyatt, it "involves passing the assets of a pension fund to an external party for highly engaged, proactive advice and implementation".
Fiduciary management was developed in the Netherlands during the 1990s and the early part of this decade. With an estimated €700bn of pension fund assets in the country, set against a (purchasing power parity) GDP of US$645.5bn [source: CIA Factbook], it is clear that the actions of pension funds play an important part in the country's economic activities.
Amongst institutional investors, certainly European investors, the Netherlands are often seen as the very acme of pension management, with an embedded and sizeable social welfare system. As a result, pension issues are generally regarded to be high up on the political and academic agenda.
As Patrick Disney, head of institutional business with SEI noted: "It means there's a lot of activity and input put into the governance of funds."
He added "There have been big changes for the pension fund environment over the past decade or so. In the 1990s, pension funds were fully funded, and were not part of a problem for the balance sheet. Since then, increasing regulation, changes to accounting practices and fiduciary requirements have all added up to a more onerous responsibility for trustees."
With such a degree of investment maturity and focus, Sleijpen agreed pensions were a very important consideration in the Netherlands.
"The Netherlands are seen as thought leaders in the field of pensions," he said, continuing: "As a country, we started to think about these issues before other funds elsewhere in the world. The Dutch started looking at these issues early and in a thorough way, partly because we have a lively, strong and vibrant pension sector. The second pillar is very strong compared to the first and third pillars and the size of the second pillar is even larger than Dutch GDP."
Fiduciary management gained traction in the Dutch market, and indeed in other markets, due to a number of factors.
Sleijpen said the proliferation of different managers, consultants, advisers and other pension professionals working on a scheme led to trustees wondering if they were still in control, and if the interests of each party were aligned.
Allied to this was what Van Nunen termed the "brutal" operating environment pension funds were in and the complexities they faced.
"Regulation and new guidelines make it hard for smaller funds, say below €5bn, to comply. The range of investment products available in the market is also complex and hard to integrate into the portfolio. This often leads to lower funding ratios," van Nunen added.
Pieters agreed: "Pension funds and the operating environment have become more complex. There are only a small number of pension funds that are big enough to make the complex investment choices by themselves."
As Sleijpen noted, increasing complexity and the number of parties and intermediaries in any arrangement increased costs: "There are also cost considerations. Fiduciary management according to the philosophy of APG reduces the number of parties, making for a more efficient organisation. You need to reduce the numbers; it makes it more efficient and cheaper."
Disney agreed trustees were often hamstrung by meeting only once a quarter, meaning that the time taken to implement or change the investment strategy was longer and the process was less dynamic.
He noted: "A fiduciary manager is proactive and can take these investment decisions on behalf of the pension fund on a day by day basis."
Recent market developments have underlined the importance of a fund having the ability to react to changing situations.
As Pieters said: "Pension fund boards are ultimately responsible, and their role has become a full time job. They need to be able to take a step back and focus on the strategic issues rather than the day-to-day business. They require a partner who can offer solutions, not just products."
Another key reason to consider implementing fiduciary management was the possibility that funds could make up for any 'governance gap' between what they wanted to be able to do in terms of investments and their current abilities.
Watson Wyatt's Trickett said fiduciary management was appealing for many pension funds that wanted access to asset classes and investments, the complexity of which were greater than the fund's own in-house governance ability would allow. "It's a question of outsourcing and building governance capabilities using some form of delegated model," he said.
Robbie Bowker, a principal with asset managers P-Solve said: "There are significant gains to be made in terms of economies of scale. This approach can provide access to products and asset classes that might otherwise be prohibitive due to the size of the scheme and/or governance constraints which are closed or require minimum investments and alternative asset classes that they might want to use - in particular alternatives such as commodities - but are too small to be able to access. It significantly reduces the delay in investment decisions and allows for a more dynamic view."
Disney summed up the argument in favour of fiduciary management: "It's about creating better value and demonstrating better governance as it's not siloed advice. Indeed, fiduciary management has been bought by some of the largest funds in Holland because of this clearer approach to decision-making and accountability.
"Now funds in the UK are looking closely as its advantages. In the present system, consultants are not accountable. In fiduciary management, it's much clearer for trustees."
Misunderstandings around the fiduciary approach
Yet, despite the obvious advantages, there are a number of potential pitfalls a fund would need to be aware of. One of the main criticisms of the approach was that by hiring a fiduciary manager, the fund might feel it had relinquished control over how it was run.
Van Nunen disagreed: "The fund is still very much in control. It gives more help and experience, leading to better decisions being taken. That's the biggest factor." As much as there was a perceived governance gap, there was also an 'education gap', whereby trustees needed to be brought up to a suitable level to understand the actions of the fiduciary manager.
Van Nunen continued: "A fund needs to be able to understand what the fiduciary manager is doing. Pension funds shouldn't think that it will be easier - it won't, it'll be more complex. But it will be more exciting. Education could therefore be the sixth task for the fiduciary manager."
Trickett outlined a few other causes which might make a fund consider a fiduciary management-type approach: "A fund might not have these investment skills in-house. Alternatively, a fund might have a simple investment strategy made up almost exclusively of equities and bonds and not need this approach. Some may be worried about the potential for conflicts of interest, and that's a fair question any trustee would want to address."
Resolving any potential sources of conflicts of interests was a definite cause for concern. Pieters said it was important a fiduciary manager had clear processes to prove there were no conflicts of interest and that responsibilities were separate. "We've been able to show that we have a very clear separation of duties in our processes - it's pretty black and white," he said.
Bowker added that transparency itself removed a lot of conflict, which was some comfort to clients, and there was always scope for further scrutiny: "There are a lot of checks and balances to go through. If a company wants a second opinion on any aspect, that's fine. Some clients have independent trustees or independent advisers sitting in on trustee meetings."
Trickett said there was a definite need for trustees to be aware of the potential for conflicts of interest: "Trustees need to be aware of it and there needs to be transparency. But perhaps schemes have to accept the trade-off - accept a bit of compromise on the conflict of interest aspect in return for the advantages."
Bowker remained pragmatic about conflicts of interest: "We're honest, there are conflicts in many aspects of life. You just have to be sensible and grown up about it." Pieters concluded "At the end of the day, it's the client's choice."
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