The fiduciary management sector is facing a “pivotal point” in its development as defined benefit (DB) schemes mature and the investment and regulatory landscapes grow more complex, according to a new report.
Isio’s annual fiduciary management survey found that growth has slowed in terms of new mandates, with schemes outsourcing in full rising by 1.2% since last year. Those outsourcing part of their portfolios rose by just 0.4%.
This slow growth was in part down to the improved funding position of DB schemes, which Isio said had meant that trustees were moving towards “simpler, lower-risk investment strategies, reducing the need for complex fiduciary solutions”.
Despite this, overall assets under fiduciary management grew substantially – up by more than 20% year on year to a record £261bn.
The Pension Protection Fund’s 7800 Index of DB schemes shows that total assets grew by 9.5% over the 12 months to the end of October 2024.
Isio said the increase reflected the growing popularity of schemes adopting an “outsourced chief investment officer” (OCIO) model, which involves the implementation of a scheme’s investment strategy while maintaining a separate third-party investment consultant, in line with the regulatory separation of advice and implementation.
Paula Champion, partner and head of fiduciary management oversight at Isio, said: “As fiduciary management evolves in 2024, the industry faces both new demands and shifting dynamics that reflect the maturing landscape of UK DB pensions.
“The assets growth of 20% this year highlights how large OCIO mandates are reshaping the market, yet a slowdown in mandate growth suggests a greater emphasis on de-risking and simplified strategies for well-funded schemes.”
Changing risk appetite
As funding levels have improved, fiduciary management mandates have adapted to reflect de-risking intentions.
Isio’s research found that more than half of mandates now have a return target of 1.5% or less over liabilities. This, the consultancy said, had pushed fiduciary managers to “explore alternative credit and cashflow-driven investment strategies”.
“Fiduciary managers are poised to play a crucial role in preparing schemes for insurer-ready transitions, reinforcing their value in an increasingly complex environment.”
Paula Champion, Isio
Almost half of the schemes covered by the report were targeting an insurance transaction, Isio found. More than a third (36%) of mandates are now less than three years from buyout, up from 24% a year ago.
“This shift reveals a focus on achieving sustainable, low-risk returns while maintaining the flexibility needed for insurance transitions,” Champion said.
“As regulatory pressures drive schemes to formalise endgame objectives, fiduciary managers are poised to play a crucial role in preparing schemes for insurer-ready transitions, reinforcing their value in an increasingly complex environment.”
Governance to the forefront
Two years since the Pensions Regulator took on oversight of fiduciary management tenders following the Competition and Markets Authority’s (CMA) review, governance of outsourced arrangements had “strengthened considerably”, Isio said.
More than a third (34%) of fully outsourced fiduciary management mandates are now overseen by an independent adviser, up from 22% four years ago. More than half of schemes with fiduciary mandates also employ a professional trustee, adding another layer of independent oversight.
On top of this, around two thirds use a third-party evaluator to monitor the performance of their provider. Independent evaluations have also become more frequent, Isio reported, with 38% of schemes obtaining reports quarterly and 38% annually.
