CMA order: Are trustees equipped to assess investment consultants?

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In December, pension trustees will for the first time start setting strategic objectives for their investment consultant and measure their performance. Can a strong process be implemented amid conflicts and  given the short deadline? 
 
An order by the Competition and Markets Authority obliges pension funds to set objectives for their investment consultants – and monitor them against these – from 10 December this year. The order results from the CMA’s investigation into the fiduciary manager and investment consulting markets, after the Financial Conduct Authority had identified issues in these areas. 
 
The DWP issued draft regulations on how it plans to implement the CMA order, and the Pensions Regulator consulted on draft guidance for trustees in late July this year. At the time of writing – just over six weeks before the requirement comes into force – finalised regulations and guidance had not been published. 

TPR said that consultant objectives can relate to investment performance delivered relative to the liabilities, adviser performance against service level agreements, communication skills, value for money and performance against specific tasks, such as asset transitions or investment manager selection exercises. Investment consultant performance should be assessed at least every 12 months and the objectives themselves at least every three years, the DWP has proposed. 
 

Concerns over potential conflicts 

 
Trustees have slowly become aware of the fact they need to set consultant objectives – and equally so for DC investment advice – because they will be strictly prohibited from taking investment advice without having clear objectives, but some are sceptical if all trustees are equipped to assess and, if necessary, challenge investment consultants on their performance. 
 
TPR notes that the consultant should have input to ensure objectives are realistic but warns: “You should be aware of the potential for their input to be subject to conflicts of interest and you should be prepared to challenge their input. You should also consider whether to involve a third party to help you set those objectives.” 
 
The potential for conflict, especially where trustees lack strong investment knowledge, is what some in the industry have described as not only ‘marking your own homework’ but even ‘setting your own exam questions’. If a consultant is heavily involved in defining what they should deliver and if they have met their goals – including whether they should be held responsible if they haven’t – there is arguably little point in having the objectives. 
 
“There is a danger that investment consultants themselves will become too directly involved in the process,” says Barry Mack, director at governance specialists Muse Advisory. “There’s also a danger that trustees will do the minimum to comply – that would be a lost opportunity," he adds. 
 
Mack recommends setting up a monitoring framework with a dashboard and clearly measurable objectives.  
 
“Another adviser could help with the set-up and be invited to review the monitoring on a regular basis depending on the trustees’ capabilities to do this themselves,” he says. “Much of what we have seen to date looks fairly weak – a consequence of investment consultants setting their own performance criteria. 
 

Short deadline ‘requires pragmatism’ 

 
This could be an issue to do with the tight deadline, however. The CMA's final order came out in June, leaving time for two trustee meetings at most, notes partner at law firm Eversheds Sutherland, Simon Daniel. 
 
This short timescale requires pragmatism, he says, as there is not enough time to take third-party advice on the issue. “Because of the timescale they’re having to say, ‘We’ll let our investment consultant propose some objectives and then we’ll say whether we’re happy with them or not,” he says. 
 
The key around assessing consultants is knowing one’s limits, he believes: "It’s all about knowing what you know and what you don’t know.”  
 
But trustees might need third-party firms to help them, especially with the monitoring piece, says Daniel; if an investment consultant has missed its performance target and explains it away, it could be difficult for trustees to challenge the explanation without deeper investment expertise.  
 

Will third-party input be needed? 

 
Andy Scott, a professional trustee at Dalriada Trustees, agrees the monitoring will be a big task, though “how extensive it will be and how closely reviewed and monitored [investment consultants] will be by trustee boards is something that only time will tell”, he says. 
 
Assessing consultant performance where there has been a liability management exercise or a significant change in markets could be difficult, he believes. 
 
The workings of a trustee board itself could also obscure consultant performance if the implementation of a recommendation is delayed, for example, because meetings might only take place quarterly. 
 
He agrees trustees should seek third-party input for assessing consultants, saying that this would be the fairest way to do so. 
 
One such third-party provider is IC Select, which offers services to tender and monitor fiduciary management and investment consulting services. 
 
Director Donny Hay says the requirement will be “a game changer”, as “for too long, trustees accepted mediocrity”. 
 
With the tight deadline of 10 December, most trustees will only do what it takes to “get it across the line”, he believes, but predicts that this will change in the new year. 
 
“Next year it’s about the ‘how’, what does good look like, what does ‘exceeding expectations’ look like... what are your expectations," he notes. This will be followed by discussions around how to measure consultants. This could involve tying fees to performance and, he observes, often does not lead to a change in provider – but it does usually lead to improved overall terms and services. 
 
The requirement to measure and assess investment advice could, as a side effect, increase scrutiny around how trustees review their own effectiveness as a board. The regulator’s July consultation on the future of trusteeship will likely also lead to more discussions around this. 
 

How will the new requirements on investment consultants be implemented by trustee boards?