The Pensions Regulator has published updated guidance on the tender process for fiduciary management services and trustees, setting objectives for investment consultants as it prepares to take over regulation of these duties this autumn.
Since December 2019, trustees have been legally required to run a competitive tender process when appointing fiduciary managers for a fifth or more of scheme assets, and have had to set strategic objectives for their investment consultancy provider.
From this October, TPR will take over compliance-reporting and policing responsibilities for these requirements from the Competition and Markets Authority, after the Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022 made last month by the Department for Work and Pensions. The regulations were published for consultation in 2019 but the process was delayed due to the coronavirus pandemic.
The switch of regulatory duties from the CMA to TPR will hopefully lead to more guidance for trustees and a simpler certification process
Peter Daniels, Barnett Waddingham
‘The new regulations don’t change the goalposts’
These duties were first introduced by the CMA’s Investment Consultancy and Fiduciary Management Market Investigation Order 2019 following its probe into the sector, which found that trustees who tendered for fiduciary management services were more likely to pay less and receive better quality service. It also discovered that trustees faced difficulties monitoring the quality of investment consultancy services due to limited available information.
TPR’s executive director of regulatory policy David Fairs said the introduction of these regulations should not place an additional burden on schemes given that for two years they have had to comply with their obligations and self-certify their compliance to the CMA.
He added: “Robust monitoring of a scheme’s financial advisers can influence the effectiveness of its investment outcomes and ensure it is following long-term plans. It also helps trustees ensure they are delivering value for money for savers.”
TPR said in its guidance that by increasing trustee engagement in the adviser appointment process, and by setting objectives and monitoring performance against those objectives, trustees “will achieve better outcomes for their schemes and better value for money”.
The watchdog also expects that monitoring the adviser’s performance against their objectives will enable trustees to better identify and manage areas of poor performance and to consider switching to an alternative service provider where appropriate.
The guidance issued by TPR is in line with the legislation made in July and is therefore as expected, according to Hymans Robertson chief investment officer David Walker.
As schemes have already been complying with the CMA order, the main change for pension trustees will be the switch of compliance reporting and policing responsibilities to TPR.
Peter Daniels, Barnett Waddingham head of fiduciary manager evaluation, said most of the concrete action needed from the industry following the CMA’s market review has already been taken, and that the new regulations under TPR do not change much for the industry.
“The new regulations don’t change the goalposts in the vast majority of cases, which is pleasing to see. The switch of regulatory duties from the CMA to TPR will hopefully lead to more guidance for trustees and a simpler certification process,” he said.
The road to better outcomes
Under the new TPR rules, trustees will have to review the performance of their investment consultant provider against their objectives at least every 12 months, which also applies to reviewing fiduciary managers.
Anthony Webb, Isio head of clients, fiduciary management advice, noted that while many pension schemes already have these good governance practices in place, not all will. This will be a mandatory requirement for everyone from October 1 2022.
Daniels said the requirement to review advisors against their objectives on an annual basis should help in “driving better outcomes for trustees and the industry more generally”.
Walker said the guidance provides some helpful case studies on the themes and areas that can be included when setting objectives, and is a “useful reference point when reviewing or updating existing objectives”.
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Many believe that the CMA’s intervention has resulted in the fiduciary management market becoming more competitive in the past two years. “That alone is a great outcome for the pension schemes that choose this type of investment approach,” Daniels noted.
The pensions watchdog will be able to issue compliance notices and penalties to those that fail to meet requirements or heed a compliance notice. It will be able to fine individuals up to £5,000 and up to £50,000 for corporate entities if they do not comply with a compliance notice.
The CMA order will still apply to the Local Government Pension Scheme for the time being. Replacing it will require relevant regulation to be issued by the Department for Levelling Up, Housing and Communities.
