Partner Insight: Russell Investments' David Rae and Paul Wharton discuss how fiduciary management has changed in response to a shifting market context and what we might expect to see going forward
How are fiduciary management solutions adapting to changing market dynamics and demand?
David: When we started working with fiduciary management clients ten years ago, the solutions were very much focused around increasing the funding level and introducing better risk management through liability hedging. Now, the nature of the liabilities is a greater focus, particularly for those schemes who are cashflow negative. For a lot of schemes, they're in a well-managed, risk-controlled place and the objectives are shifting towards the ultimate end-game for that pension fund.
What role can cashflow driven investing (CDI) play in today's climate?
Paul: As schemes mature, inevitably the money being paid out to pensioners starts to outweigh the money coming in. In a sense, the true purpose of a pension fund is coming to the fore; the payment of benefits to pensioners. Trustees must be able to pay the benefits due to their members next week, next month and next year. Cashflow driven investing is about putting more structure around how you facilitate that from the assets. One answer could be that a scheme sells down some of its assets every time it needs to pay a pension. But, of course, you are then opening yourself up to transaction costs, potentially selling at depressed prices and not giving those assets a chance to rebound if there has been a market fall. So, cashflow driven investing is about trying to invest in assets that give you some form of relatively secure cash flow that you can then offset with those pension payments.
Why is effective delegation key in a fiduciary management relationship?
Paul: Delegation is a spectrum, but it's often spoken about in a binary way: you either do
fiduciary management, or you don't. But it doesn't have to be an all or nothing approach.
As a prospective user of fiduciary management, it really is important to identify the decisions you want to delegate and ensure that the service you buy is not just a packaged ‘solution' but is one that provides you with the delegation that is right for you. In my experience, fiduciary management generally gives trustees a real richness of information that you can't get with a standard adviser approach. Trustees tend to take one of two views: some think ‘we're employing a fiduciary manager to deal with the information and we'll let them go
away and do their job', while others choose to embrace that increased information and get more involved in the detail and understanding of what's going on. And there's certainly space for both types of approach.
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