In part three of our special report looking at fiduciary management for defined contribution (DC) schemes, Laura Macphee explores whether the charge cap will make it difficult for schemes to use a fiduciary manager


Jane Wilson pensions manager at Caterpillar says she does not think that many DC schemes choose to use active managers because the added costs are harder to justify to new savers. 

However, PTL’s Richard Butcher disagrees. “People have moved away from passive investment in DC to a large extent over the past few years, although we have to wait and see whether more people go back towards passive investment because they have got nothing else to go to [after the charge cap is introduced in April 2015]”.

“The big challenge relating to more creative investment approaches in DC [such as fiduciary management] is the impact of the charges cap,” echoes independent trustee and chief executive of PAN Governance Steve Delo. 

Fiduciary management might add value in DC but it can be relatively costly”

“Furthermore, the market is pricing well below this, with most prominent master trusts hitting much lower levels, for example 50 basis points at The People’s Pension. 

“Fiduciary management might add value in DC but it can be relatively costly and the question is whether quality FM can be squeezed into DC pricing.”

This is a judgment call that each scheme will have to make individually. Schemes need to look at the governance models available and decide which is most appropriate for them, given time and cost pressures. 

“It would be a very individual decision,” says Wilson. “It would have to depend on the shape of your DC investment… It’s really for those who feel they’ve a great deal of complexity in managing their assets.”

Case study - Caterpillar

Jane Wilson, pensions manager

“Because our defined contribution (DC) was set up to run parallel to our defined benefit (DB), and because we’ve passive funds rather than active management funds, it’s hard to see how [fiduciary management]  would offer us anything particularly beneficial. 

Our investment managers and advisers attend DC meetings in person, in the same way that they attend our DB meetings. Although we don’t use it on our DB side, part of that is because we have in-house investment management – people who sit on our trust board. We have our advisers, plus at least two of our trustees have a background in investment-type activities.

If you had a very active investment management policy then I can see that it might make a difference. But I can’t see that many advisers saying: “Yes, it’s right that you should have an active fund as your default.” 

A lot of the perceived wisdom is that although you get potentially higher returns from active management, in the long run passive is a much more sensible option.

From our perspective the other driver is that 90% of our members are in the default fund. I don’t think that’s unusual. Our trustees feel very keenly that the onus is on them to get that default fund right and appropriate for as many people as possible. 

Therefore, having that split into a number of managers, one of whom might be active with higher charges, seems to go against the grain. 

You’re only likely to have actively managed funds in DC if you’ve got quite a big fund”

You’re only likely to have actively managed funds in DC if you’ve got quite a big fund. Ours isn’t huge – it’s only £200m, so in DC scale it’s not massive. Equally, if you’ve a massive fund does that mean you’re likely to be a larger company, and therefore you’ve got access to more expertise anyway? 

The banks I suspect would say “we use our own investment expertise”. Why would you go out and pay someone else to do it when you’ve access to that kind of expertise already?

In the DB world you know what you’re trying to achieve – somewhere where your assets match your liabilities. 

In a DC world where the decision-making around investments so much lies with the individual, it’s difficult to see how a fiduciary manager would necessarily add masses of extra value.