Professional Pensions asked eleven of the leading UK fiduciary management firms questions about key skillsets, performance measurement standards and challenges for the year ahead. This is what they said…
Tony Baily is a client director at Cardano. He helps clients to achieve stable growth in their funding position, with no nasty shocks. He has over 20 years' experience in the pensions industry as an investment consultant, scheme actuary and a corporate pensions adviser.
Partner and head of European distribution, delegated consulting services
Sion Cole is partner and head of European distribution for Aon Hewitt's delegated consulting services. He is responsible for understanding client needs and ensuring Aon Hewitt delivers all clients bespoke solutions to meet their requirements. Sion is a Fellow of the Institute of Actuaries and began his career in investment consulting.
Head of UK institutional business
Goldman Sachs Asset Management
David Curtis is head of UK institutional business for Goldman Sachs Asset Management. He joined Goldman Sachs in 2005 and was named managing director in 2011.
Managing director EMEA, Institutional Group
Patrick Disney serves as head of SEI's Europe, Middle East and Africa (EMEA) group. He joined SEI in 1999 to set up the London office.
Partner and head of fiduciary management
Ben Gunnee is the UK Leader for Mercer's fiduciary team. He has held a number of leadership positions since joining Mercer in 2002 - and, during this time at the firm, he has advised and implemented solutions for some of the largest institutional investors globally, in addition to a number of top 10 UK pension funds.
Head of clients
Kempen Fiduciary Management
Donny Hay joined the firm in 2013 and is responsible for existing clients and developing Kempen's fiduciary management business in the UK pensions market. Prior to joining Kempen, he was an independent trustee at LawDeb Pension Trustees.
Head of fiduciary management
Mark Humphreys is head of fiduciary management at Schroders and is responsible for the design and delivery of fiduciary solutions to clients. Prior to joining Schroders in 2007, he was a senior investment consultant at Watson Wyatt in Leeds and worked at Aon Consulting in Manchester. He is a fellow of the Institute of Actuaries.
Managing director and EMEA head of LDI Solutions,
David Rae is EMEA head of LDI Solutions at Russell Investments and is responsible for the design, construction and management of all LDI solutions for clients in the region. He is chair of Russell's LDI steering committee, which is accountable for the LDI research agenda and client portfolio positioning.
Barbara Saunders is a managing director of P-Solve, where she has worked since 2007. She is responsible for managing eight pension scheme relationships ranging in size from £70m to £2bn and has significant experience of providing advice across the full range of investment considerations, including setting objectives and strategy, manager evaluation and selection, transition and effective governance.
Head of UK delegated investment services
Pieter Steyn is head of Towers Watson's delegated investment services in the UK. He leads several fiduciary management client relationships and is an experienced senior investment consultant. He joined Towers Watson in 2002.
Andrew Tunningley leads BlackRock's UK strategic client team, where he is responsible for the relationship management of large UK pension schemes. He was previously global practice leader for investment at Aon Hewitt
What do you think are the key reasons pension funds should consider fiduciary management?
Baily: Many reasons are given (e.g. lack of time/expertise, quicker decision-making, better governance, etc.) but ultimately they all support the same key goal – achieving better outcomes. The goal being to reduce the pension deficit in a more planned and controlled way, with no nasty surprises. To do so requires investment expertise and focus.
Unfortunately, many trustees don't have enough time to dedicate to this. Working with a fiduciary manager allows trustees to focus their time on the issue that matter most – the investment strategy. Importantly, trustees remain in control of their fund's investment objectives, risk tolerance and performance monitoring.
Fiduciary management helps take away trustees' worries.
Cole: I think the key reasons pension funds should consider fiduciary management are:
- Professionalisation of scheme investing – by this we mean that fiduciary management has led to the running of scheme investments to be more professional. The day-to-day management is undertaken by fiduciary providers who have the required knowledge and time.
- Fiduciary management brings together the strategic decisions and timely implementation.
- It offers an investment management approach that considers all the assets relative to the liabilities with the sole purpose of improving the funding level.
- Fiduciary management allows more frequent monitoring of a pension scheme's position so that opportunities are captured as they arise and are not missed.
Curtis: The appointment of a fiduciary manager is additive across the whole of the governance landscape. The delegation of tasks including implementation, portfolio management, manager selection and risk management among others, allows enhanced outcomes and importantly frees up time for trustees to focus on the key decisions driving scheme outcomes. The manager's input and guidance in making these key decisions and the ability to swiftly implement them is also a key benefit. Delegation of investment also allows the adoption of a less constrained investment strategy, ultimately allowing a wider ranging and more efficient investment outcome to be targeted.
Disney: Fiduciary management can improve pension governance by allowing trustees to assign discretion, within clearly defined parameters, for day-to-day investment responsibilities to a single, accountable provider. This can include responsibility for manager selection and replacement as well as de-risking along a Journey Plan as opportunities arise. It empowers trustees by giving them more time to focus on strategic issues and provides a framework for reacting nimbly to fast-moving market conditions.
Gunnee: Fiduciary management is essentially a range of services to help trustees enhance the existing governance of their pension scheme assets. The key benefits of fiduciary management include:
- Enhanced risk-adjusted returns through greater diversified portfolios
- Access to a wide range of best in class investment managers
- Improved stability in funding levels
- Enhanced risk management and de-risking capabilities
- Speedier decision-making and implementation
- Reducing costs.
The arguments for fiduciary management have never been stronger than the current environment, where there is increasing need to improve funding levels, provide greater certainty as to the outcomes and reduce costs wherever possible.
Hay: There are a significant number of reasons why pension funds consider fiduciary management. Below we briefly outline the top five cited reasons on why we have seen schemes move to fiduciary management.
- Improved decision making: Fiduciary management results in faster and more efficient implementation of the decision making process
- Improved expertise: Fiduciary management gives the trustees a highly experienced team that can work closely with the trustees in helping to make the best decisions for their schemes
- Improved risk management: Fiduciary management involves the management of assets and liabilities in an integrated way
- Scale: Fiduciary management is the consolidation in the UK pensions market offering reduced asset management costs, greater sophistication and diversification for smaller schemes and access to state of the art in infrastructure systems
- Improved governance: Increased delegation enables trustees to focus on the real value added aspects of their role such as an increased focus on strategy
Humphreys: In an increasingly complex world where resource is often limited, trustees and sponsors need to focus on their most important investment decisions: defining their funding objectives, and agreeing a long-term strategy for achieving them.
Furthermore, in many cases defined benefit pensions are a legacy issue as an increasing number are closed to accrual. Trustees and sponsors are therefore focusing on their end-game and managing cost along the way.
Fiduciary management can help Trustees and sponsors achieve this. By delegating the day-to-day management of investments they free up time to focus on what matters most: securing members' benefits.
Rae: Defined benefit pension funds in the UK are faced with a multitude of challenges. They need to generate investment returns to recover deficits and meet ongoing costs while managing risks for beneficiaries, trustees and sponsoring employers. All this is happening at a time when the investment landscape is increasingly uncertain and returns harder to find. Fiduciary management allows funds to focus on the key strategic issues that matter to them achieving their objective. By delegating the management activities to a fiduciary manager, trustees benefit from greater control, more timely investment decision making and the economies of scale of a larger pool of assets.
Saunders: Fiduciary management can be a powerful tool for clients with constraints on their governance budget. Our fiduciary management clients have seen significant improvements in their investment performance since we commenced this service 12 years ago, for three reasons.
It helps focus governance time. By using a fiduciary manager to implement investment strategy, trustees are free to focus on the big picture.
It ensures the right people are making the right decisions at the right time. Trustee boards that lack the expertise and time required to follow markets and make medium-term investment decisions may find a fiduciary manager ideal.
It enables clients to benefit from economies of scale they cannot obtain on their own. This reduces costs and facilitates broader diversification.
Steyn: DB pensions are now largely a legacy issue, which reduces the ability and willingness to tolerate volatility in funding levels. It is, however, a real challenge to develop and implement a truly robust investment strategy, especially at a time when the outlook is perhaps less rosy. Fiduciary management is a governance and investment solution to fill this gap by providing a combination of advice and implementation.
Clear accountability for implementation is also a very attractive feature of fiduciary management. Trustees recognise that by delegating responsibility for implementation, it allows them to concentrate on strategic aspects such as determining appropriate risk and return parameters and applying their investment knowledge to oversight.
Tunningley: Since the introduction of the Pensions Act 2004 and the establishment of The Pensions Regulator, the funding level of the average UK DB scheme has fallen and its recovery plan has lengthened. The traditional approach to pension scheme investment has failed and both sponsors and trustees can look forward to many more years before schemes are fully self-sufficient or bought-out. Fiduciary management is not the only answer to this problem, but by passing the most difficult decisions surrounding hedging, asset selection and market timing to an expert, it must improve the odds of success.
What do you believe is the most important skillset of a fiduciary manager and why?
Baily: A skilled fiduciary manager combines the experience and technical abilities of an asset manager with the pension knowledge and client focus of an investment consultant.
Helping trustees determine what investment strategy meets their objectives requires an investment consultant's understanding of the liabilities. On the other hand, to decide how best to implement that strategy is a portfolio management decision, which needs the skills of an asset manager.
The challenge is to find a specialist fiduciary manager with dedicated experts bringing together both skill-sets for your benefit. Such a fiduciary manager can help you achieve planned and controlled improvements in your funding level in line with your objectives.
Cole: The ability to construct a complete investment portfolio specific to a scheme's individual needs and investment beliefs, with a benchmark that is directly based on their unique liabilities.
Why is this important? Liabilities are a moving target specific to each scheme and their circumstances. The portfolio needs the right level of manager diversification and skill, in the right asset classes (whether they be used for growth or matching) and at the right time, in order to improve any funding gap with minimum volatility.
Curtis: Ultimately the fiduciary manager is tasked with delivering against the investment objective of the scheme. As such, we believe that at its core a fiduciary manager should provide access to experienced investors with a proven ability to allocate capital in order to deliver tailored investment outcomes and manage risk exposures on an ongoing basis. However, such a skill set must be combined with an ability to understand each individual scheme's needs in order to discuss and agree with the trustees, the overall investment objective driving the strategic asset allocation.
Disney: As every scheme is unique, the ability to offer a delegation model that is customised to the preferences and comfort levels of the trustees is critical. Furthermore, they should be able to adapt the model as the needs of the trustees evolve.
Gunnee: A fiduciary manager must be able to provide a comprehensive range of skills to trustees including:
- The ability to design a robust strategy, or journey plan, that takes into account the current situation, trustees objectives and risk appetite, sponsors views.
- Being able to construct a well-designed liability matching portfolio that stabilises and protects the funding level.
- Building smarter return-seeking portfolios that improve the risk/return characteristics of the current portfolio and generate excess returns to reduce funding deficits.
- Provide clear and transparent reporting and communications. Strong operational processes and systems to monitor and capture funding level gains, and provide robust day-to-day management of portfolios.
Hay: In order to have the correct skillset, a firm needs to have a focus on fiduciary management. This includes a client-centric mentality backed by a proven track record that is capable of getting schemes to full funding while keeping risk and costs as low as possible. This requires being able to work effectively with the sponsor as well as the trustees.
Humphreys: Fiduciary management is the outsourcing of a pension scheme's investment arrangements, so genuine investment management skill and experience is crucial. This includes real-life experience of making asset allocation decisions, sound risk management and operations functions, and a focus on value for money and cost-effective implementation.
A fiduciary manager must also work seamlessly in partnership with clients on the design of their investment strategy. This requires a deep understanding of their clients' needs, and experience in guiding clients through the formulation of their funding objectives. It also means clearly communicating how the investment strategy is performing, and providing information that helps clients assess the effectiveness of the fiduciary manager.
Rae: First and foremost, a fiduciary manager has to possess the investment skills to generate the required investment outcome within an acceptable level of risk. At its heart, fiduciary management is an investment management activity. The fiduciary manager needs to design the right client solution; construct a portfolio with the right exposures to a broad array of asset classes and investment strategies; and manage the portfolio on an ongoing basis to exploit opportunities and avoid risks.
Saunders: Communication with the client is paramount - both to understand their specific circumstances and to allow trustees to govern the strategy when it's up and running. Clear and transparent reporting with regular training should be a staple of every fiduciary relationship.
From an investment perspective, it's important the fiduciary is managing both sides of the balance sheet - with an overall objective that's related to the scheme's liability. Then, in our opinion, the manager should be prepared to take a view on the overall economic backdrop and investment environment and make changes to the portfolio efficiently - otherwise, what are you paying them for?
Steyn: We believe a fiduciary manager should be a trusted partner helping trustees to fill the governance gap over the long term through the phases of a scheme's evolution. A track record of acting in alignment with trustees' objectives is therefore extremely valuable. The focus of the skillset shifts through the phases:
- The ability to translate unique client context into a competitive investment strategy
- Excellent portfolio construction skills to generate robust returns over time
- The ability to make wide use of investment tools and solutions as the scheme matures - LDI, buy-ins and longevity hedging
- Evidencing high operational standards throughout
- Value for money at every stage.
Tunningley: Fiduciary management is a risk management activity – taking risks when they are rewarded, hedging those that are not and dynamically changing exposures as markets move. The fiduciary manager must therefore have a comprehensive view of both the portfolio and the market and the ability to move instantly when opportunities arise. This requires real-time position reporting, nimble decision making and full control of the operational processes.
Is a common performance measurement standard needed for fiduciary management to enable schemes to make like-for-like comparisons across different providers? If so, what should such a standard be based on and how do you think it could be implemented?
Baily: Yes. Performance should be tested against two measures:
- Scheme-specific liability benchmark; and
- Risk-adjusted peer group benchmark.
Firstly, "has my fiduciary manager achieved the objectives I set within the constraints I set?" Some argue that trustees should stop here.
However, most people sensibly would then ask "could someone else have achieved a better outcome?" - i.e. a higher return for the same risk or the same return with lower risk.
To enable such a comparison needs fiduciary managers to provide risk-adjusted returns (after all fees) across their clients. If those risk-adjusted returns are good, why wouldn't you be happy to publish them?
Cole: No. We believe that performance league tables are only suitable for products, where the participants have similar investment objectives and are compared against similar benchmarks and with the same opportunity set. For example, there are industry-wide performance tables for each product / fund type such as FTSE UK equities or MSCI World with relevant targets, such as +2% p.a.). This is appropriate as each have very similar objectives and investments, and are essential very similar products just with different lead fund managers at the helm.
Fiduciary management is a bespoke solution, not a product and therefore a performance league table would be inappropriate and potentially misleading. There are so many variations within fiduciary solutions – such as different investment objectives and unique liability benchmarks that drive them – that it means no two solutions look the same. And just as the solution in place will be tailored to each scheme's unique needs, thus the expected returns would also be unique. And just like you shouldn't judge a book by its cover, you shouldn't judge a provider purely based on a headline performance number as there's a lot more to it than that.
If you force a comparison, we could end up seeing us revert back to the days of peer group benchmarks, like the CAPS median, which isn't a positive thing for the pension scheme industry overall.
Curtis: Within a genuine full fiduciary offering, the solution will, by its nature, be highly bespoke and tailored to the scheme's specific circumstances, constraints and liability characteristics. In addition, each mandate will incept at a different date, under differing prevailing market conditions. As a result, drawing a fair comparison between provider, and even individual client, outcomes is extremely difficult. That said, we understand how important a proven track record is to many trustee groups. As such, a fiduciary manager should be able to provide historical performance as a proof statement supporting their investment philosophy and framework.
Disney: This is certainly something that the industry should be working towards. At present, however, making a like-for-like comparison is difficult owing to a number of factors, namely: not every fiduciary manager produces performance metrics; those that do use different measuring criteria; providers have varying levels of delegation within their fiduciary mandates and clients have differing objectives.
As it stands there are two quantitative ways to measure the performance of a fiduciary manager:
- Relative improvement of the scheme funding level versus the goal
- Relative reduction in funding level volatility.
Typically this information is regularly and clearly communicated by the fiduciary manager to the client, making performance evaluation simple.
Gunnee: It is important that trustees who are considering a fiduciary manager understand their track record and where performance has been generated and the risks being taken. We believe the industry needs to continue working together towards producing a common set of principles as to how performance should be measured and reported in order for like-for-like comparisons.
There are a couple of non-fiduciary firms looking to produce performance measurement standards but given the wide ranging services provided by a fiduciary manager it has proved challenging to find the right answer. Ultimately there should just be one standard set of principles applied, as multiple different performance measurement providers using different principles can lead to confusion.
Hay: Yes, a common performance measurement standard is needed. Comparisons will need to be treated with caution given that every pension fund is different and better performance measurement will help the trustees realise that FM is working. Certain FM advisers are looking at ways to aggregate FM performance data into different return ‘brackets' and apply GIPS standards to eliminate any selection bias.
Humphreys: Greater transparency across the fiduciary management industry is vital, as it enables trustees to make better-informed decisions. Whilst we acknowledge the challenges involved, protesting that it is too difficult to provide a common standard is not a valid excuse.
We welcome a common performance measurement standard and suggest that it:
- Separates decisions that are owned by the client from those of the fiduciary manager. For example, trustees may choose not to implement the fiduciary manager's recommended level of liability coverage.
- Enables comparison on a like-for-like basis as far as possible. This might include grouping clients by return target or level of liability coverage.
- Includes a range of measures, such as funding level risk and costs, as well as headline performance.
Rae: A common standard should be developed and it is not mathematically difficult to calculate the investment return relative to the liabilities, taking into account specific risk and key client constraints. Unfortunately, however, this will not on its own be sufficient to help trustees assess whether a particular fiduciary manager has a consistent and repeatable investment process that will deliver success in the future. As always, past performance alone is not a guide to future performance.
Saunders: Trustees deciding between fiduciary managers would find a common performance measurement standard useful, but only if it is reliable, objective and genuinely comparable.
The measurement that matters most to scheme trustees is actual investment performance of real client portfolios relative to their liabilities. Excluding the impact of contributions, have the assets grown by more than the liabilities?
The performance of the liabilities can be assessed by proxy. For each of our clients, we determine a portfolio of fixed and inflation-linked gilts that reflects their liabilities in terms of interest rate and inflation risk, which makes reporting this aggregate performance very easy.
Steyn: It is always helpful to understand whether or not a like-for-like comparison is being made. A common performance measurement standard may therefore help in this regard. Most mature DB pension plans now have some form of scheme-specific de-risking strategy in place, which means that their objective is changing over time. Each plan also has a unique set of liabilities - their benchmark - which can be measured in a variety of ways. It will therefore remain a challenge to make any meaningful comparisons.
We remain opposed to any form of league table to avoid any incentive to herd around average strategies. This would be a step backwards, as fiduciary managers must provide a bespoke fiduciary service.
Tunningley: We see no reason why the performance of fiduciary management should not be measured, attributed and reported in the same way as any other asset management activity. While it could be argued that each client strategy is bespoke and hence that mandates cannot be compared with each other, there is enough commonality for comparisons to be drawn across different managers, different approaches and over time. We support the development of composite-based reporting, aggregating similar mandates in the same way as GIPS requires for ‘traditional' portfolios, and believe that this process is best managed by an independent body.
What are the key issues fiduciary managers need to address over the coming 12 months?
Baily: We live in an uncertain world, with questions around:
- China's slowdown
- Quantitative easing in Japan and Europe
- Rate rises in the US and UK
- Political tensions
While we have views on the most likely market scenarios, we are well aware that anything can happen. Therefore, we choose to consciously diversify our exposures.
Our aim is a balanced portfolio that is resilient to shocks and robust to a changing world. This provides clients with planned and controlled improvements in their funding level in all market conditions.
Cole: One of the main challenges for the fiduciary management industry overall is the conflict of interests faced by TPEs and how that is being addressed. For example, where a TPE is active in both the traditional investment advisory space and the fiduciary TPE space, how is the TPE addressing the conflicts that exist?
In addition, how can a scheme/trustees tell if a TPE has performed well? Perhaps a league table reflecting the best to worse TPEs should be considered to help this based on some form of client satisfaction or fiduciary outcome. A price/cost per TPE exercise table may also help trustees choose which provider they want to appoint to enable a more easy comparison.
Curtis: On an investment front navigating a tightening monetary policy environment following a period of unprecedented easing, coupled with the potential destabilising effects of a Chinese economy rebalancing towards consumer driven growth will sit foremost in the minds of fiduciary managers.
For the fiduciary management industry to flourish in the coming year, participants need to ensure that conflicts (both real and perceived) surrounding the industry are openly discussed, clarified and managed. This will ensure Trustees can explore and understand the fiduciary landscape before making an informed decision as to whether to appoint a fiduciary manager.
Disney: Fiduciary managers need to provide greater transparency around costs so that trustees understand what they are paying for. Providers must also continue to develop innovative, client-centric solutions that focus on key issues such as efficient liability management and reducing funding level volatility.
Gunnee: The key issues that fiduciary managers need to continue to address over the next 12 months is to ensure they are solving the unique issues that each of their clients are facing. For some clients this will be how to generate increased returns from their assets to close funding level deficits, for others it will be about minimizing funding level volatility and for a well-funded scheme, it might be how the fiduciary manager supports the scheme in moving to buyout or a self-sufficiency portfolio.
Overall, it is about the fiduciary manager really understanding their clients and then delivering the appropriate solutions to address the client's needs.
Hay: I believe the key issues fiduciary managers need to address over the coming 12 months are as follows:
- Show how decisions will benefit your client rather than yourself
- Continue to demonstrate that FM is adding value and that client satisfaction is high
- Increased cost transparency. Client should receive a detailed breakdown of all costs e.g. fiduciary management, asset management (external and internal), other costs e.g. custodians and an estimate of all transaction costs
- Improved measures of success. We believe in a balanced score card approach incorporating qualitative and quantitate measures combined in an easy to understand way.
Humphreys: We believe the two key areas to focus on are:
- Improving the level of transparency in the industry. An industry-wide performance standard would help with this.
- Encouraging further debate about the conflicts of interest inherent in some fiduciary management business models, and working together across trustees, consultants and managers to address these. The FCA's asset management market study should help with this.
Rae: The biggest challenge facing pension funds over the coming 12 months and beyond will be how to generate the returns required to recover deficits and meet ongoing costs. After the global financial crisis, there were 5 years of abnormally strong returns from most asset classes but these were outweighed by increasing liability values. Fiduciary management has put a greater emphasis on liability hedging and an enhanced approach to risk management. However, the key to success for pension funds in the future will be the ability of the fiduciary manager to generate returns in a risk controlled manner in an environment where returns are much harder to come by. A dynamic investment process that rapidly and effectively exploits opportunities and controls risk will be a necessity.
Saunders: Navigating the impact of interest rates rising in the US and UK will require careful thought over the next 12 months. We still believe that the speed and extent of the rises may be slower and lower than the market is pricing in. At the same time, others economies may still be loosening monetary policy, including the Eurozone and Japan.
Emerging market economies will also need careful consideration. What may once have been considered as a homogeneous asset class is increasingly demanding a more nuanced approach, with some growing while others diminish.
This backdrop may create some quite stark opportunities for regional asset allocation to make big differences to portfolio outcomes.
Steyn: Fiduciary managers must remain focused on providing flexible, cost-effective governance solutions tailored to each client's context and long-term goals.
They should build investment portfolios that are more robust than the simple passive equity / bond portfolio available at low cost.
They should avoid using generic, over-priced products otherwise the investment industry will not change for the better.
Tunningley: Next year's challenges will come from two directions. Markets will continue to be volatile and it is likely that we will enter a new regime of rising interest rates. This will challenge long-held assumptions of correlation and hence diversification and will focus attention on the true nature of the risks that are being run in current portfolios.
At the same time, existing and potential fiduciary clients, independent consultants and the pensions press will subject fiduciary managers to more scrutiny; over performance, costs, transparency and conflicts of interest. Managing the fiduciary business will become more time consuming, hopefully not at the cost of managing the fiduciary portfolios.
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