Stefano Carnevale, Investment Consultant reflects on recent experience of advising pension schemes as they approach full funding.
The role of a pension scheme trustee is constantly evolving with more and more schemes moving rapidly towards their ‘end game’. Expedited by current market conditions, particularly increased bond yields, and heightened reporting requirements, governance burdens have undoubtedly increased for trustees. Add to this the ongoing whirlwind of economic activity which investment strategies need to navigate through and it can feel like the list of agenda items at trustee meetings is increasing at an exponential rate.
Whilst the work of trustees to spearhead schemes through this plethora of issues is a continuous process, the investment industry does offer some respite. Fiduciary Management (“FM”) is a governance solution in which trustees delegate some, or all, of the implementation of their investment strategy to a third party. It’s estimated that over 900 UK DB pension schemes (c.19%) utilise a form of FM, and its popularity among small to medium size schemes has been growing.
The idea that trustees can simply hand over the ongoing complexities of their investment strategy is appealing, but unfortunately inaccurate. Whilst the solution allows for delegation, it doesn’t mean giving up control. The two are subtly different. Trustees retain responsibility for setting core investment objectives and parameters which the FM will implement, and will always remain accountable for the outcome. Ensuring there are clear, precise parameters within which investment decisions are made is critical as it gives confidence to the trustees and allows the FM arrangement to work in the most efficient manner.
As a scheme approaches its end game, particularly if that end game is to buy-out with an insurance company, these parameters can begin to be less clear. Whilst trustees may have their eyes fixated on the prize of finally offloading their scheme’s liabilities, the FM could be perceived to have a greater incentive to retain management of scheme assets. As the saying goes, this would be very much like “turkeys voting for Christmas”.
This is why it is crucial for schemes to have independent FM oversight in place. An FM oversight provider will independently assess and review the investment solution. They will ensure the investment strategy remains appropriate, taking into consideration the complexities of the portfolio and its match with the objective, particularly so if buy-out is the target. And of course, as the scheme funding improves and the asset mix changes, the management fees and reporting requirements will change. The oversight provides trustees with additional reassurance that investment decisions are aligned with their end game and their stewardship beliefs.
A fundamental concept is in regard to the decision making of the FM and how this is reflected in the portfolio. Trustees should ensure that the investment strategy evolves over time and the FM is capitalising on opportunities presented by the market. This ‘value add’ is key and should aim to be captured by the FM.
As the investment landscape evolves, so does the expectation that trustees have a sound understanding of both the technical and governance aspects of their investment strategy. At Quantum we are on hand to help, and have been providing FM oversight to our clients for over 10 years. Our experienced team ensures that trustees are getting the best out of their FM to bolster the chances of meeting the desired objectives.
To find out more, please reach out to one of Quantum’s FM Oversight team:
Paul Francis
Principal Investment Consultant
paul.francis@qallp.co.uk
Stefano Carnevale
Investment Consultant
stefano.carnevale.qallp.co.uk
John Plenderleith
Senior Investment Analyst
john.plenderleith@qallp.co.uk