Trustees were ordered by the Competition and Markets Authority to set objectives for their investment consultants and will ultimately have to review these every three years, so how have things changed between trustees and advisers since 2019? 

 

More than two years ago, the CMA published a report about its investment consultant market investigation, where it found issues with competition in the consultant and fiduciary management markets. As part of the remedy, it issued an order which, among others, stated that pension trustees must not use an investment consultant unless they have set strategic objectives for the consultant. 

 

There was some debate about how to do this, in particular because while investment performance can be measured, it is not a given that all of the trustees’ decisions were driven by a consultant’s advice; trustees are free to reject advice. 

 

 

It seems that to date, not much has changed, as the government’s regulations implementing the CMA order have been pushed back until the first half of next year while the Covid-19 crisis and Brexit took precedence. 

 

Natalie Winterfrost, a director at LawDeb Pension Trustees, says that in many cases the first draft of objectives has been provided by the investment consultants, but notes that “this hasn’t necessarily been a problem where trustees have engaged with the process and ensured that the objectives proposed are the right ones”. Similarly, some assessment templates have even been populated by investment consultants in the first instance, she adds. 

  

“Ideally, though, the trustee board would have the time and resource to drive the objective setting, albeit engaging with the investment consultant. Some trustees have managed to lead on this, or they have used their scheme secretariat, thereby maintaining independence,” she explains. 

 

Winterfrost says there is still progress needed before the typical set of trustee objectives could be considered ‘SMART’ - specific, measurable, attainable, relevant, and time-bound – believing that the measurement of objectives is still subjective in most cases.   

 

Measuring investment advice is also complicated by the fact that there can be considerable time lag before the effect of a decision is known.  

 

“It can often take many years, and the benefit of hindsight, before a board will really know whether they were successful, meaning that short-term assessment of investment consultant performance may be driven more by other factors, such as proactivity and timely delivery of cost-effective advice, in a manner that is understood,” she says. 

 

 

While goals may have been introduced, it is still unclear however whether the attainment of these has any bearing on whether the board wants to review the consultant or not. Winterfrost says it is unlikely that many boards are changing their investment consultant as a direct result of the objective setting and assessment process, but that the process is worthwhile nonetheless. 

 

“We are seeing productive feedback conversations, resulting in a better understanding of expectations and highlighting where trustee boards want to see changes or improvements from their investment consultant. Some of our boards have found enough value in the process that they are keen to extend it to other advisers,” she says. 

 

So far, the impact of the CMA order is not felt, suggests Donny Hay, a director at consultant and fiduciary management evaluators IC Select, saying that advisory search activity has been at all-time lows. However, “where schemes are assessing progress and results it will often be the catalyst for a full market review – something most DB trustees haven’t done for over 10 years”. 

 

 

Most trustees "have been kicking this can down the road” since December 2019, he says. 

 

“Certainly a number of trustee boards have been waiting until face-to-face exercises can be undertaken,” he says, although he says some are now starting to reassess that premise given the ongoing Covid lockdowns. 

 

He notes that investment, unlike covenant, is an area where trustees can take influence, yet most can’t say if their investment consultant is doing a good job or not. “Some may feel that investment consultants are homogenous and it doesn’t matter which you use,” he says, but observes that the funding level of DB schemes as measured by the PPF 7800 has gone down since before the financial crisis despite a long bull run in equity and credit markets. 

 

Trustees measuring their consultants are “generally using a Balanced Scorecard approach as advocated by TPR – but many we have viewed are 'motherhood and apple pie'”, he says, arguing that they are “too general and vague”. 

 

 

Ian Cormican, partner at law firm Sackers, says that although trustees need to adhere to the CMA order, there is no obligation to review consultants against their objectives until the Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2019 are brought into force. 

 

"Nonetheless, trustees may still consider it good practice to undertake a review, and the Pensions Regulator has provided guidance on setting objectives and a case study with a template scorecard which some trustees are using as a reference point,” he notes. 

 

Consultants might suggest a first draft of the objectives, Cormican says, adding that “it seems reasonable to use these to get off a blank sheet of paper”, but the trustees should try to provide input. “The key is for trustees to ensure that the objectives they set are relevant to their scheme and circumstances and are measurable,” he says.