Is the pandemic driving schemes to fiduciary management?

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The fiduciary management market is seeing an uptake in activity, driven in part by the Competition and Markets Authority order to retender by early June this year, but industry experts say the pandemic has made trustees reassess their governance models. 
The fiduciary management market was expected to see a high degree of tender activity after the CMA ordered pension schemes to retender, in an attempt to crack down on the cosy relationships many investment consultants enjoyed with schemes. 
But the negative attention from the CMA investigation has not damaged the sector in terms of inflows, it seems. Consultancy Isio said last year that tender activity since the CMA order was high but to a “more subdued extent than anticipated”, but this picture may have changed.  
Pandemic makes for ‘natural review point’ 
While the pandemic meant that retenders were in some cases put on the backburner, it also led to a stock market crash in its early phase, as well as oil price adjustments and bond challenges, spooking trustees who were just getting used to remote meetings. Some of them may have since decided that fiduciary management is a nimbler way of navigating markets, even it means they are a step further away from it. 
XPS partner Andre Kerr said the financial stress at the start of the pandemic made for “a natural review point to allow trustees to consider the governance model they’re operating under”. 
The stock market fall in the first quarter of 2020 has not just had an effect on trustees but on fiduciary managers themselves, bringing out big performance dispersion last year. While some fiduciary managers thought the market would get worse and derisked at the height of the first wave, others saw an opportunity to rerisk, leading to performance differences for the whole of 2020. This has in turn led to manager reviews, Kerr noted. 

Retenders put downward pressure on fees

Retenders are also underway, although he pointed out that there are “an awful lot of schemes that still need to retender – anywhere from a quarter to a third”. The delay is down to Covid and the fact that "the time required to do it hasn’t been thought about necessarily,” he believes, warning that “to receive three bids from providers and evaluate these takes time”. 
Two-thirds of retenders do not lead to a change in provider, as only in about 36% of cases the manager is replaced, according to the Isio survey, but this does not mean the outcome was unsuccessful, according to Kerr. 
For the trustees to understand that their provider is the right one for the circumstances, especially if they were appointed some time ago or if the trustees have changed, can also constitute success in his view. A retender also allows schemes to make sure their manager uses “the full breadth of the toolkit”, bringing in new investment ideas. “We're seeing quite a lot that the portfolio hasn’t really changed,” he said. 
And there are of course the fees; Kerr claimed there has been a reduction of these in every tender he has been involved in. Some fiduciary managers are even reviewing the fee structure of existing clients ahead of any tender, he said, “rather than looking like they’re only doing it because they’re going through a competitive process”. 
Donny Hay, a director of oversight provider IC Select, said that “fiduciary managers have hardly missed a step, in spite of Covid, in terms of managing investments, progressing funding levels or being able to respond to IC Select tenders in time”. 
Retendering activity is intense at the moment, and given the number of hours required to apply, “fiduciary managers are being very selective about the retenders they are willing to participate in”, he said, turning away about a third of these mandates in 2021. 
Hay agreed that there is downward pressure on fees, saying that “for those we have retendered, the FM fees are down 25% on average and over 50% in some cases”, suggesting that those that had not tendered had “old-fashioned pricing or excessive margins”.  
Similarly, asset management fees are falling, partly because of schemes changing from active to passive or smart beta, which is proving to be a trend.  

Are schemes running out of time? 

Where schemes have not retendered yet, they need to hurry up, agreed partner at consultancy and FM provider Aon, Tony Baily. “I'd imagine between now and June it’s going to be the busiest time that there has been for opportunities for fiduciary managers,” said Baily. “It's incredibly busy, which is good, but… if schemes are thinking about going for retender, they need to be giving them now as much time as possible, starting as quickly as possible.” 
He said the tender activity has helped to give Aon a clearer idea of where fiduciary management fees should be. “That's been a helpful process for us, to make sure clients are paying what we think are competitive fees,” he said. 
Most schemes prefer to pay fixed fees as percentage of assets rather than including a performance element, he said, noting that the latter stems from a time when early clients wanted to see that fiduciary managers had ‘skin in the game’.  
The downward pressure on fees is also felt by underlying managers. Fiduciary managers should be able to negotiate “a significant discount and pass that on in full” to avoid conflicts of interest, said Baily, with typical savings in the range of 30% but in some cases as much as 75%.

Will a fiduciary manager take schemes to buyout? 

There is a trend towards CDI in fiduciary management, but Baily sees this as just one of two directions. “A lot of people in the market are pushing CDI. But for many schemes, the endgame will be buyout. Most insurers are just not prepared to accept much more than cash, gilts and possibly some investment grade credit,” he observed. 
Parts of CDI can be illiquid, meaning schemes can’t take advantage of buyout opportunities when they arise, he argued. 
The majority of schemes would like to get to buyout, agreed Phil Redding, an executive director at fiduciary manager Cardano. “We've seen a huge increase in buyout and buy-in activity over the last 12 months,” he said.  
Endgames are getting closer, while the fallout from the pandemic is still coming through, he observed. Both make 2020 "a great year to learn” he said. 

Has your scheme considered moving to FM for the first time, or increasing assets in partial FM? 

Phil Redding
Donny Hay
Andre Kerr