Conflicts of interest make it increasingly difficult for trustees to assess the performance of consultants, finds Stephanie Baxter
At a glance:
• Firms are blurring the line between consultant and salesman
• This makes it difficult for trustees to assess the performance of providers
• Trustees can take steps to address this, but there are limits
The ability of a customer to judge whether she is getting good value from providers is a conundrum in any industry, not least in pensions. That was made clear in a review by the Financial Conduct Authority (FCA) that found some trustees are struggling to effectively assess their asset managers and investment consultants.
The Wholesale Competition Sector Review 2014-2015 found conflicts of interest and lack of competition in these industries.
Reactions from the pensions industry have been mixed: some believe the FCA raises important issues while others are more sceptical. The issue cropped up in last week's PensionsBuzz survey where 53% of respondents said most trustees were able to assess the quality and value of services from managers and consultants, while 28% disagreed and 19% did not know.
PTL chief executive Richard Butcher is not surprised by some of the findings, saying some difficulties are "inevitable" in a system dominated by lay trustees. Although he believes they bring a lot to the table, he says: "You can't rely on a system that operates on lay membership and expect them to be experts. Your average lay trustee isn't best placed to effectively choose or monitor consultants or investment managers - how can they be as they are out of comfort zone? They don't have nearly enough terms of reference elsewhere to cross check quality. It's a subject matter they don't terribly understand."
Conflicts of interest
The big problem is the complexion of the agents has changed significantly in recent years. Most big consultancies have branched out from advice offerings to products such as fiduciary management (FM), while a number of product providers now offer advice.
BESTrustees chairman Alan Pickering says the blurring of the lines between advice and product makes it difficult for trustees: "It's that supermarket approach that's the real challenge for trustees. I don't see anything inherently wrong in consultants offering solutions or FMs offering advice but the lack of clarity is a challenge for trustees."
This will become a bigger challenge as many consultants broaden their service offerings to protect against the move from defined benefit (DB) towards large scale defined contribution.
Butcher believes conflicts of interest among consultants, cause problems, particularly where they provide fiduciary management. The difficulty for trustees is knowing whether firms are talking as consultants or product providers.
Conflicts are not necessarily detrimental if they are managed. It is only an issue when trustees don't have the tools to test firms, says Butcher: "The risk from a regulatory perspective is that lay trustees are not best placed to challenge and act in an informed way while advisers have conflicts of interests that then lead these trustees who are easy to lead."
Association of Member Nominated Trustees (AMNT) committee member David Weeks is surprised at some of the review's findings. He believes an efficient trustee board would have a risk register and quarterly review of performance to keep on top of things.
The greater risk is smaller schemes may find it more difficult to fund these activities, he says.
What trustees can do
It is important to remember there is a limit as to what trustees can do - as with any other consumer/provider relationship. A good consultant will be able to provide an accurate and adequate description of the role a product or provider will play for them.
Pickering says: "If your consultant can't talk to you in a way you understand, it's not you that's at fault, it's the consultant. It's the role of consultants to make a decision in an area where trustees are quite bright but not their day job.
"Most trustees should have enough self-confidence to choose the right help, the right person from the right organisation. You don't need a PhD in pensions to do that."
To get around the issue of lack of choice when appointing consultants, Pickering advises focusing less on the actual firm and more on the individual who will advise trustees.
The FCA is also worried consultants may be advising schemes to use expensive active investment strategies over lower-cost passive strategies in order to justify their fees. Weeks says this is a matter trustees should keep under review.
The use of non-disclosure agreements (NDAs) was also brought to the watchdog's attention, a topic that continues to divide opinion. Some respondents said they made it hard for trustees to know if they were getting a good price relative to others. One said most favoured nation clauses, used to ensure sellers give buyers the lowest price they offer, can make it harder for subsequent investors to negotiate low prices.
This was news to Weeks: "I was surprised at this as I wasn't aware that either of those were common practices. I wasn't aware it was a big factor."
Pickering says costs should be negotiated on a case by case basis and that NDAs have a place but were not always appropriate.
The FCA has been criticised for failing to give detail on the 70 organisations that responded. Weeks believes it is important to know which firms made the comments on trustees' ability to assess their agents. The AMNT was not consulted, for example.
Weeks believes the FCA should follow up its "think piece" with an action statement to give trustees a clearer view on what it thinks would be good practice.
One trustee who does not struggle to assess agents
Colin Wood, trustee of Babcock International’s DB pension scheme, does not struggle to assess managers and consultants.
The company and its four schemes decided five years ago to form a dedicated investment committee which draws representatives from each of its schemes. The committee reviews all the investments along with the advisor.
Wood explains: “These trustee representatives work closely with the group investment advisers to ensure that all investments are rated and assessed against standard performance criteria. These trustees become, in effect, specialist investment trustees and they report back to their respective boards on the progress of the investments made.”
They also develop and implement the overall investment strategy after getting agreement in principle from each scheme.
Wood adds: “This allows the trustee boards to focus on the other pressing aspects of their schemes and be confident that the investment is being suitably catered for. I think the collective size of the schemes helps.”
This week's top stories included the Department for Work and Pensions issuing two separate consultations on the pensions dashboard and defined benefit consolidation.
A regime similar to that for defined contribution (DC) master trusts will be set up for regulating defined benefit (DB) consolidators under plans announced today.
Defined benefit (DB) superfunds that wish to enter the market must talk to The Pensions Regulator (TPR) about their plans before opening for business.