The government has excluded transition management from the scope of fiduciary management in its response to the Competition and Markets Authority’s 2018 investigation of the sector.
Asset-backed contributions and buy-in policies, meanwhile, will not count towards an asset threshold for the compulsory retendering of fiduciary management services.
In 2018, the CMA published a report identifying competition issues surrounding the fiduciary management and investment consulting sectors.
It found low levels of trustee engagement, difficulties in assessing value for money, and examples of customers being pushed by consultants towards their own fiduciary management services.
These changes in the way services are bought and evaluated will facilitate good governance, ultimately reaping benefits for scheme members and corporate sponsors
Patrick Cunningham, Cardano
An order from the competition watchdog, which came into force in 2019, requires scheme trustees to run a tender when appointing a fiduciary manager for more than 20 per cent of their schemes’ assets.
It encouraged trustees to shop around in order to obtain the best value for their schemes. The CMA also recommended that the government makes the required legislation to enable the Pensions Regulator, rather than the competition watchdog, to oversee trustee duties.
The Department for Work and Pensions’ full response was published on June 6, having been delayed last year.
New rules to enter play in October
The DWP, along with the Treasury, the Financial Conduct Authority and TPR have accepted the CMA’s findings.
The bodies jointly committed to taking forward the CMA’s proposals in March 2019, backing the compulsory retendering of investment consulting services and TPR overseeing new trustee duties.
In July 2019, the DWP issued a consultation proposing the required changes to the Occupational Pension Schemes (Scheme Administration) Regulations 1996 and the Register of Occupational and Personal Pension Schemes Regulations 2005.
The new rules are expected to come into force at the start of October. TPR will update its published guidance beforehand.
Chief among the changes made to the 1996 regulations will be the removal of transition management from the scope of fiduciary management services.
Transition management involves the delegation by trustees to their investment consultants of the transition of assets during changes to portfolios, along with amendments to asset manager rosters.
Carrying out this service alone will no longer mean that the person doing so is a fiduciary management provider.
The government is also amending the 1996 rules to ensure that an asset manager providing investment consulting advice within 12 months of having been appointed as an asset manager is counted as a fiduciary manager. This time limit is being removed.
‘Common sense provisions’
The DWP has opted to exclude asset-backed contributions and buy-in policies from the calculation of 20 per cent of a scheme’s assets, which is being used as a threshold for mandatory retendering.
The Pensions and Lifetime Savings Association had warned that including ABCs “could result in difficulties when putting the regulations into practice, due to the subjective nature of any valuation of an ABC structure”.
An asset manager that is connected to an investment consulting provider via a joint venture, meanwhile, can be a fiduciary manager, according to a further amendment.
The DWP has also added a provision ensuring that “high-level commentary” given by an actuary during a valuation does not fall under investment consulting.
It has also limited schemes’ review periods for investment consulting providers to three years, in order to ensure this does not become inadvertently prolonged by any significant changes to investment policy.
Patrick Cunningham, partner and co-head of clients at Cardano, said he was pleased to see “common sense provisions like mandatory tendering for fiduciary managers and setting objectives for investment consultants” become law.
“These changes in the way services are bought and evaluated will facilitate good governance, ultimately reaping benefits for scheme members and corporate sponsors,” he said.
Natalie Winterfrost, chair of the Society of Pension Professionals’ investment committee, noted that the government’s response lacks surprises, but she added that a “couple of areas of doubt may remain — in particular, ‘when exactly does a fund manager become a fiduciary manager?’, and ‘is the actuary caught by the requirement to have objectives?’”
“On the first point, many solutions-based asset managers, who do not intend to be fiduciary managers, may be able to take comfort from the final drafting that they do not provide investment consulting services when involved in three-way discussions (with a scheme and its investment consultant) on appropriate asset allocation and details of mandate structures,” she said.
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“But the risk probably remains that some might shy away from providing potentially valuable input for fear of then being caught by the regulations.
“With no specific exemption for scheme actuaries, but instead just clarification that high-level commentary in actuarial valuation reports is not ‘investment consulting services’, it seems actuaries might still get caught by the regulation,” she continued.
“The safest approach (and one that applies best governance practice in any case) might just be for trustees to set objectives for their actuary alongside their investment consultant.”
