Mandatory tenders welcomed by pensions industry

The competition watchdog found an adverse effect on competition in both the investment consultancy and fiduciary management markets, but the majority of its recommendations were aimed at fiduciary managers.

The underlying disease is poor governance. I can’t imagine a situation where I would appoint an asset manager with a mandate that covers the vast majority of my assets without wanting to tender it

Richard Butcher, PTL

Schemes that have already appointed a fiduciary manager without a tendering process will have to retender within five years, while managers themselves will have to disaggregate their fees and costs, including those related to exiting the product.

The report puts a strong focus on the strength of the trustee buy side, arguing that the Pensions Regulator should provide greater support for schemes running tenders for both services.

John Wotton, chair of the CMA’s Investment Consultants Market Investigation, said: “We’re concerned that pension schemes are not currently putting pressure on the market to get the best value for money on behalf of their members.”

“They may lack the information they need to compare competing offers and so could be sticking with their existing investment consultant or fiduciary manager when there are better options available,” he added.

'Big three' breathe sigh of relief

The introduction of mandatory tenders was welcomed by the so-called 'big three' consultancies, who have been accused of ‘flipping’ consultancy clients into fiduciary mandates and who feared a potential forced separation of their businesses.

Aon disputed the finding that there was an adverse effect on competition, while Mercer said the report detailed a market functioning as it should. Willis Towers Watson said it has been a long-term supporter of increased transparency. All three stated their support for the remedies, stressing the importance of proportionality.

Mandatory tendering has also won the praise of smaller competitors. “We’re very supportive of mandatory tenders, and one aspect of the report that came out was the importance of having clear objectives,” said Richard Dowell, co-head of clients at fiduciary manager Cardano, adding that making trustees set objectives would make it “much easier to tally what their needs are versus what each firm can provide”.

For some, a key requirement is that the tendering process is not run by the same company that has the incentive to flip clients.

“They will have a massive head start and if it’s just run without any independent oversight it’s a bit pointless,” said Patrick McCoy, head of investment at consultancy XPS Pensions.

Is there a wider governance problem?

Richard Butcher, managing director at professional trustee company PTL, said that while tendering is eminently sensible, mandatory processes paper over a wider problem with poor governance.

Just 34 per cent of buyers of fiduciary management carried out a formal tender, according to the report, a figure Butcher expressed dismay at.

“The underlying disease is poor governance. I can’t imagine a situation where I would appoint an asset manager with a mandate that covers the vast majority of my assets without wanting to tender it,” he said.

Butcher expressed concerns that unscrupulous consultants could merely organise a “minimum compliance” tender, and urged the regulator to continue to drive up governance standards. The CMA report calls on the regulator to provide trustees with support during the tender process.

Push for better reporting

The competition watchdog also found that trustees do not always get all the information they need to make proper decisions when buying consultancy or fiduciary management services.

It recommended that both services should have to adopt a common standard for reporting their performance, albeit with more stringent requirements for fiduciary managers.

Fiduciary managers will have to present costs and performance using standardised templates, as the majority of the market has already begun to do.

For investment consultants however, the watchdog stopped short of imposing the same requirements, insisting instead that trustees set objectives before hiring a consultant, and that the service provider reports against those goals.

The CMA found a less acute problem with the investment consultancy market, which has a large cohort of mid-market firms competing for business, including some relatively new entrants.

“They’ve said that they’re persuaded by the argument that clients might not choose to take all your advice,” said Dan Mikulskis, managing director at Redington. “We think we ought to be held to that [standard], whether or not clients take our advice.”

“I was quite surprised that schemes don’t [set objectives] and that investment consultants haven’t pushed their clients to do it,” said Roger Brown, founder and director at IC Select, which is in talks with consultants over a standardised reporting framework. “If you don’t know where you’re going you don’t know where you’re going to end up.”

He said objectives, just as with the assessment of scheme performance, should be expressed as performance relative to liabilities and net of any fees.

Consultants step closer to FCA oversight

In a less surprising move, the CMA took forward the recommendation that the FCA’s remit be extended to cover investment consultants, who do not currently fall under any formal regulation.

Regulation of the sector has been something of an anomaly, with some choosing to register with the financial watchdog anyway.

McCoy said the proposal was sensible, as long as the requirements placed on consultants do not allow for conflicts of interest.

For example, he hoped to see the regime “make it a requirement for pension schemes to get independent advice when they invest in a regulated investment”, calling the idea that a consultant might write a section 36 letter recommending its own fiduciary management product “ridiculous”.

The CMA is now consulting on its proposed remedies, with submissions invited by August 24 2018.