In part one of our special report into fiduciary management for DC, Laura MacPhee explores the merits of fiduciary management in a busy post-budget world
It is one of the latest pieces of industry jargon – but managers of defined benefit (DB) schemes are becoming increasingly familiar with fiduciary management. Until recently, defined contribution (DC) schemes could pretty much get away with ignoring it, but now the industry is developing a new form of delegated management for DC.
Yet the industry is divided on whether fiduciary management for DC is worthwhile.
I’m not aware that there is a lot of demand”
Ralph McClelland, associate director at law firm Sackers, says that the service can range from circumstances where a pension scheme trustee “delegates the entirety of their discretion that they can delegate to a manager so that the trustees are retaining an oversight strategic role, right through to circumstances where the manager is really only providing a slightly more proactive recommendation service that’s then ratified”.
Where is the demand coming from? “I’m not aware that there is a lot of demand,” says McClelland.
At the moment, fiduciary management for DC is a relatively nascent idea. But providers must anticipate interest from pension schemes, otherwise why bother?
The reasons DC schemes might consider fiduciary management are the same as those given by DB schemes, according to Britt Hoffman-Jones, a managing director at P-Solve, an investment consultancy which offers fiduciary management for DC.
Providers must anticipate interest from pension schemes, otherwise why bother?
Essentially, this is that the in-house pension team does not have sufficient time or expertise to run the scheme with confidence alone.
Thanks to the changes announced in the Budget, this is a particularly busy time for trustees. According to Sophia Singleton, a partner at Aon Hewitt, one in five do not think they will be ready for April 2015 when they will have to implement the changes.
Hoffman-Jones says:“By delegating some of the day-to-day investment it means that our clients have more time to spend on some of the strategic issues, but importantly some of the communication issues that are paramount to the success of DC.”
It means that our clients have more time to spend on some of the strategic issues”
“For a long time pension schemes took the view that ideally members should make their own investment decisions,” says Ashish Kapur, head of European institutional solutions at asset management company SEI.
“Most of their efforts, therefore, would be spent on communicating investment information to their members, rather than trying to get the design of the default strategy right.”
However, schemes have had to question their priorities since implementing auto-enrolment; most new members will not make investment decisions and will enter the scheme’s default fund instead.
We need to get the default right because that’s where most people are going to invest”
“We need to get the default right because that’s where most people are going to invest,” adds Kapur.
This is a perfectly valid point, but equally, savers who have been auto-enrolled into the default fund are unlikely to understand and accept the value of fiduciary management and the additional costs it brings.