Big schemes turn to fiduciary managers during pandemic

The pandemic accelerated an existing trend, the research found, as the UK fiduciary management market has grown by 14 per cent a year over the past five years by number of clients, with assets under management up 22 per cent a year over the same period.

Around 60 schemes a year converted to fiduciary management during the five years leading up to 2019, but that number fell by 45 per cent during 2020, which the IC Select report attributes to trustees having “to adjust to new ways of working while responding to the issues raised by the pandemic”.

“The rate of schemes converting largely recovered during the first half of 2021 as the workloads of trustees began to return to more normal levels. This was despite the considerable strain placed on fiduciary managers as a result of having to respond to the [Competition and Markets Authority’s] new guidelines on retendering,” it stated. 

In this instance, the trustees have delegated the whole portfolio to a fiduciary manager, so therefore it does make sense to ensure that fiduciary manager is constantly reviewing the investment strategy and the risks in the portfolio, to ensure that it’s fit for purpose for the trustees and for the pension scheme

Anne-Marie Gillon, IC Select

“It might also be a reflection of the Covid crisis, as trustees reviewed their governance arrangements to make them more robust against future crises.”

During the first half of 2021, the average size of a converting scheme increased by £120m, or 79 per cent, to £270m, after several years where the figure was relatively stable at around £150m.

Smaller schemes still dominate

The IC Select report shows that small schemes still dominate the fiduciary management market, with 54 per cent of schemes having less than £100m in assets and around a third (37 per cent) having less than £50m.

However, more than half (58 per cent) of assets are in schemes with more than £500m in funds under management. Scheme with more than £1bn account for 46 per cent of the total, while schemes with less than £50m contribute less than 4 per cent of the total.

The majority of retenders, carried out in accordance with CMA rules which mandate that schemes which did not run a competitive tender when hiring a fiduciary manager have to do so within five years of the date of that appointment, occurred likewise for smaller schemes with under £250m in assets. Only 22 per cent had assets that were higher. 

More than three quarters (78 per cent) of competitive retenders were won by the incumbent provider. Some 209 have been carried out in the past 18 months, and the report estimated there are 74 that will have to be completed “in the coming years”.

“This suggests a run rate of CMA tenders of approximately four a month on average. This is well within the capacity of the fiduciary management sector to absorb without a strain on resources,” the report stated.

There were an additional 28 fiduciary management retenders during that period that were not required by the regulator, which the report argued is likely due to trustee dissatisfaction. A vast majority (93 per cent) of these were won by competitor companies.

Anne-Marie Gillon, director and head of research at IC Select, told Pensions Expert: “What the Covid crisis did was when you have rapidly moving markets, and when you have all your assets in a fiduciary manager relationship, that fiduciary manager is able to be more nimble.

“Under an advisory relationship you may have different managers running different parts of the portfolio. So you’ve got a lot more co-ordination if you want to change the allocation quickly,” she said.

“And the decision rests with the trustees, rather than delegated to the manager. When we saw markets falling quite rapidly in March and then recovering, if there were buying opportunities, or to change allocation tactically, then fiduciary managers where in a good place to do that.”

Large schemes’ disinterest before the pandemic is partly down to the fact they have large governance budgets and several advisers, Gillon continued. These pension funds also have more bargaining power with individual managers, while smaller schemes might look to a fiduciary manager to provide that because they have more scale, she added.

Oversight a concern?

Nine in 10 schemes using fiduciary managers get strategic advice from the same manager. But less than a third (31 per cent) get independent oversight of that manager.

“Where it exists, independent oversight is more prevalent in larger schemes. Some 70 per cent of schemes with assets of more than £1bn have independent oversight, while the figure for schemes with assets greater than £250m but less than £1bn is just under 50 per cent,” the report explained. 

“Only around 25 per cent of schemes with assets of less than £250m have independent oversight.”

Gillon added: “I think there’s when it comes to the oversight, we will see a lot more in the press about this, and [it is] coming through in terms of regulation.

“In this instance, the trustees have delegated the whole portfolio to a fiduciary manager, so therefore it does make sense to ensure that fiduciary manager is constantly reviewing the investment strategy and the risks in the portfolio, to ensure that it’s fit for purpose for the trustees and for the pension scheme,” she said. 

“It does make sense that when you’ve done a delegation to one particular manager or one particular body that, yes, getting a review of that independent review to ensure that it is meeting your needs is important.”