Trustees using fiduciary managers should ensure their manager continues to provide value as endgames have moved forward and managers are looking to expand into new areas while some are also raising their fees, experts have said. 

The 2022 gilts panic has brought many defined benefit pension schemes closer to their endgame, but those with fiduciary managers should ensure the arrangement is still offering what they need, trustees and advisers said at a webinar organised by consultancy XPS Pensions Group on Tuesday.  

Sophia Harrison, a client director at trustee firm Vidett, said fiduciary managers need to evolve. The approach “worked to some degree” when schemes were in their growth phase, she said, but as more schemes are maturing, determining their endgame and paying more cash flows out, a ‘growth plus liability-driven investments’ solution is no longer necessarily the right approach. 

“This, ‘We've got this growth portfolio and we'll put it together with your LDI and we'll just change the ratios as the scheme matures’, it just doesn't work anymore,” said Harrison. 

“Fiduciary managers really need to enhance their offerings to take that into account. And unfortunately for them, it often means more tailoring to the portfolio, more bespoke work, which then in turn runs down their profit margins and profitability.” 

Harrison predicted that the number of fiduciary managers in the market would reduce. She also highlighted that as the DB market is shrinking, “fiduciary managers are looking to expand the types of clients that they engage with and seeing if they can offer their services to other types of industries to future-proof the business”. 

This trend has also been seen by XPS associate investment consultant Cindy Lo, who said many fiduciary managers are diversifying their portfolio of services and venturing into new markets, such as the charity space, family offices and insurance. 

“While this expansion can help strengthen the fiduciary manager's business while also benefitting their clients, it also raises questions about [whether] this would impact their priorities in the future,” Lo noted. 

She said for fiduciary managers with DB clients, balancing these new avenues with core responsibilities will be crucial. 

“We therefore think it is critical for you to ensure your fiduciary manager continues to meet all core deliverables set out in your scheme's fiduciary management agreement," she stressed. 

Lo also observed that the fall in assets under management as a result of higher gilt yields meant four fiduciary managers in the market have increased their management fee, and encouraged trustees to have regular conversations with their manager to set expectations regarding the fee and to discuss if it is still suitable based on where the scheme is at. 

Trustees were also advised to be careful around conflicts of interest if they are looking to buy out. Senior investment consultant at XPS, Adam Rouledge, said while each pension scheme taken successfully to buyout is “a great advert”, it also means a loss of business for the fiduciary manager.

“Independent trustees and even investment consultants have a similar conflict of interest. So you might want to get an independent view,” he suggested. 

A survey conducted by XPS about two years ago showed that “surprisingly few fiduciary managers had done a material number of buyouts”, Rouledge said. “Now I'm sure that situation's changed over the last couple of years but there are still some important questions you need to be asking.” 

Questions could include how the fiduciary manager evolves the investment strategy in the run-up to buyout, what its annuity broking capabilities are and whether the firm has an in-house team or uses a third party. 

With illiquid assets now often a roadblock to buyout, trustees might also want to ask what the fiduciary manager’s policies around illiquids are. 

“We're seeing some fiduciary managers looking to reduce their clients' allocations to illiquids across the board, in the knowledge that schemes are now more likely to be going to buyout in the short term,” Rouledge said. 

For schemes intending to run on, the sector has innovated. Rouledge noted that fiduciary managers are increasingly using some techniques borrowed from insurance companies, for example investing in assets that generate cash flows on a contractual basis. 

“In addition we're starting to see some run-on specific offerings being made by fiduciary managers, where perhaps there's a frequent distribution of surplus and that's built into the investment strategy and journey plan,” he said. 

Others are now also offering insurance against the sponsor covenant deteriorating over the future, which could incentivise run-on. 

The performance of fiduciary managers has been variable. Although all 17 that were surveyed by XPS had positive absolute returns in their growth portfolio, 12 underperformed their own target, and five did so by 3% or more. Those with the  highest absolute performance had high allocations to equities and credit, while among the group with the lowest absolute returning portfolios, two had their positive returns from equity exposure undone by hedging and downside protection strategies. XPS also found a strong link between relatively high levels of illiquid assets and lower absolute returns in 2023, when equities returned 16% and global corporate bonds 8% on average.  

What is your experience of FMs in the post-2022 environment?