The rise of fiduciary management

 

The UK fiduciary management market has been gathering steam in recent months with many global providers predicting the region is poised for faster growth than the Netherlands or the US. The UK is still considered a nascent market, with trustees just now catching on to a practice that has been around in some way, shape or form, in the US for over a decade and in the Netherlands for the past three-four years. 

Fiduciary management – also called implemented consulting in the UK or investment outsourcing in the US – allows an outside provider to manage a pension fund’s entire investment portfolio and risk. The trustees still set the risk and return targets for the overall plan.

The importance of the UK market has been highlighted with firms like Dutch manager Mn Services and US-based firm Promark Global Advisors – previously General Motors Asset Management – making a push into the UK markets this year. 

Mn Services received authorisation in March to offer fiduciary management services in the UK. The company started with plans to hit £1bn in assets in three years, but that timeframe will likely be moved up because of the strength of interest, said head of business development Colin English.  

P-Solve’s head of asset management Paul Kenner agreed that interest was beginning to build and that he had received dozens of enquiries in the past few months: “It’s really something that has taken hold in the past few months. I think last year, people were shell-shocked.” 

 

Complex issues

The realisation that the financial markets are more complex than plan sponsors previously thought has led to a re-think about outsourcing investments, industry experts said. Trustees in the UK often serve as lay trustees, meeting only once a quarter, and don’t have the time or resources to manoeuvre the changing markets. As a result it often makes sense to outsource these decisions to an outside party who works in close consultation with the trustees.

Stricter funding requirements have also played a role in the shift towards fiduciary management. 

Russell’s managing director in institutional investment services Shamindra Perera said trustees’ response to fiduciary management has changed over the past year. 

Perera said: “A year ago, the response was ‘Can you write us a paper about it?’ Now, we’re getting active inquiries.” 

BlackRock’s head of international institutional business Andrew Dyson said he’s seen the most notable growth in interest in the UK. 

“In the UK, we’ve had a significant number of conversations with clients in the past 12 months, where we would have had only a handful prior to that,” he said. “The UK is coming from a start up situation.”

 

Little acorns

As yet fiduciary management is too new in the UK to generate any reliable figures as to its size. However, there are plenty of statistics attesting to the strength of fiduciary management in its two major markets – the US and the Netherlands. In the US, about US$195bn is run through total plan outsourcing arrangements, representing 6% of all assets, according to data compiled by Casey, Quirk & Associates. The firm estimates the investment outsourcing business will reach 13% of assets by 2012. Meanwhile in the Netherlands, some 38% of the €675m Dutch asset management industry is run by fiduciary managers according to De Nederlandsche Bank (DNB). 

Dyson said it’s likely the UK fiduciary management market will match the Netherlands in terms of market penetration in the next three years. 

SEI, DC product specialist in the UK, Ashish Kapur also agreed the UK market was following in the footsteps of its Dutch counterpart. 

“In the Netherlands, we already had the land-grab scenario,” he said. “Now we’re seeing a second generation of fiduciary management in the Netherlands. So far it’s been risk monitoring and asset allocation decisions. Now... we have to show that risk management is as important as risk monitoring.”

He added: “In the UK, we are still in that first generation stage.”  

But managers say interest across the board has generally increased across all regions because of the economic downturn. 

Generally, there are four drivers to growth, said Mercer’s European head of implemented consulting Michael Kinney. 

“Most investors are aware that the principal driver of returns is asset allocation,” he said. But most trustees haven’t had the time to spend on strategy. Some trustees have also found they were inefficient when it came to making quick decisions. 

Kinney also said outsourcing removes the chance of encountering unexpected costs for things like sudden manager searches. 

And overall, he said, trustees are short on governance. “The complexity of the world has increased compared to 10 to 15 years ago. People have more third-party stake holders looking over their shoulders making sure they get the job done.”

Eddy Koning, director of Dutch scheme Pensioenfonds Campagne, had many of the similar complaints. He said the increased pressure from the Dutch central bank to keep the plan funded at 105% played a role in their decision to outsource the pension plan to Mn Services in June. The scheme is 96% funded, down from 114% a year ago. 

“We are a fairly small pension fund and we decided we didn’t have enough know-how... and the means, with regards to hiring managers,” said Koning.

He said that when the staff of the €275m system went looking for new investment strategies or new managers, “we were quite often too late or we couldn’t get the right manager.” 

Koning and his staff considered using a fiduciary manager three years ago, but weren’t happy with the dearth of managers available at the time. However, over the past year, a number of new players have entered the Dutch fiduciary management market. Most notable has been the move by Pensioenfonds Zorg en Welzijn and Stichting Pensioenfonds ABP, the two largest Dutch pension funds, to spin off their asset management units into separate entities that function as stand-alone asset managers. Pensioenfonds Zorg en Welzijn’s unit PGGM, and ABP’s firm APG, provide asset management and fiduciary services to other pension funds.  

A report in July by the DNB said fiduciary management will be one of the major themes driving the Dutch pension markets going forward and that PGGM and ABP will serve as major drivers. At the end of 2008, assets run by fiduciary managers, excluding the internal assets managed by APG and PGGM, totalled €256bn, up from €103bn in 2007. 

 

Netherlands leading the way 

In no other country has fiduciary management taken hold like it has in the Netherlands. Much of the interest there has been driven by stricter funding requirements, experts said, and that same rationale has seeped over to the UK. The Pensions Regulator in the UK requires all corporate plans to have a funding plan in place, though the length of time can vary. 

But challenges still remain. The biggest obstacle to growing the fiduciary management market is the image that trustees are “handing over the keys,” said Russell’s Perera. 

“If they see it as handing over the keys, that’s a big hurdle. That’s not the case.” 

SEI vice president and managing director Paul Klauder agreed. He said typically, trustees new to fiduciary management are concerned about the lack of control over picking managers. 

“That’s a philosophical difference,” he said.  

But trustees will actually have more control over the asset allocation decision, which has a bigger impact on returns than manager selection, he said. “Trustees used to spend 90% of their time picking managers and 10% on asset allocation. Now that’s switched,” said Klauder. 

Mn Services’ English said he thinks the biggest challenge in the UK is one of clarity. 

“There’s not confusion about what it is, but there is confusion about the different flavours and degrees of delegation that are being offered,” he said. 

This stems from the fact that there are three types of players in the UK: consultants, asset managers, or a hybrid of the two along the lines of Russell or SEI. 

English said consultants could be at a disadvantage as they try to build assets in this service. “Many trustee boards are going to have difficulty with the conflict that arises when their consultant starts to promote its own fiduciary management service. Another concern is that actually managing assets requires a fundamentally different skill set to consulting.” 

Meanwhile, in the UK, fiduciary management is a service known by many names. Consultants may call it implemented consulting, while others will call it total plan outsourcing or fiduciary management.

English said he is working with a group of managers and other industry experts, including the UK’s National Association of Pension Funds, to develop a clear definition for fiduciary management. The group hopes to make an announcement in August, he said.