How regulation is impacting outsourcing arrangements

Carolyn Saunders, Head of Pensions & Long-Term Savings at Pinsent Masons explores how the CMA investigation and MiFID II European Union regulations are leading to retendering and what ESG means for future outsourcing.

Sara Benwell POSTED ON 5/17/2021 2:08:36 PM

Fund Operator: How are the new rulings from the CMA investigation and MiFID II European Union regulations impacting the process of outsourcing investment managers and consultancy services?

Carolyn Saunders: The most obvious impact is that there has been a great deal of retendering activity already.

This started early on with quite a lot of schemes being keen to begin this process at an early stage so that they were well ahead of any deadlines.

I have seen this particularly in cases where there are professional trustees in post – I assume because they have a wider market view and are also acutely aware of the number of trustee appointments they have themselves - so are able to see the potential for a crunch point if everyone were to leave their retenders until the last minute.

It is also fair to say that most of the retenders we have seen have been relatively light touch, although that does not mean that they are just going through the motions.

“The most obvious impact is that there has been a great deal of retendering activity already”

The majority have still been robust and in fact in many cases the reason for them being light touch is because of a more thoughtful approach by the trustees.

Often, although not exclusively, this occurs where there are professional trustees involved and this is probably because they understand that there is limited value in requiring bidding fiduciary managers to jump through hoops and produce large amounts of information.

This does not necessarily add value to the process. Trustees will also be very conscious that the FMs themselves are likely to be involved in multiple retendering processes and do not want to limit their choice by deterring managers from throwing their hat into the ring, just because of the complexities of the process itself.

Fund Operator: Do you feel that this is deterring smaller FM service providers from actively seeking out these contracts, because there is so much red tape?

Carolyn: It is deterring some, but I do not see any pattern to it. FMs of all sizes are taking strategic decisions as to whether they want to participate in particular processes.

This is no more than any advisor would do if asked to participate in any tender process. 

“FMs of all sizes are taking strategic decisions as to whether they want to participate in particular processes”

There is always an assessment to be made as to whether it is appropriate to participate, bearing in mind the nature of the opportunity and the advisor’s business priorities.

This process has just become kaleidoscoped and is more of an imperative where lots of opportunities come together over a relatively short period of time.

Fund Operator: How are these rulings helping with consumer protection and providing more value for money?

Carolyn: Any retendering process must be good because it allows all parties to re-evaluate things. In our experience, the majority of retenders that we have seen have not resulted in a change of FM.

Even so, it is always healthy to go through retendering, if only to reinforce a decision made previously. If trustees understand the wider market, they can challenge their own thinking and their incumbents’ thinking on their investment strategies.

“It is always good to open the eyes and ears of trustees and for them to hear different viewpoints”

It should also get trustees considering what they might want differently in terms of reporting from a FM, since they will hear about different approaches. Obviously, there is also the potential for competition around fees.

It is always good to open the eyes and ears of trustees and for them to hear different viewpoints, see what is out there and check whether what they have is what they want.

Fund Operator: Are smaller inhouse teams being overwhelmed with increasingly complex regulatory burdens? If so, how can they mitigate this?

Carolyn: Yes, it is difficult for the smaller pension teams who do not benefit from the support of a large inhouse executive and who do not have the ability to pay for a lot of advisor support.

It is hard to know how to mitigate this because ultimately schemes do need to comply. Something that can help is where advisors are able to work together and with the scheme to make processes as efficient as possible, so that risks and compliance issues get identified and clear systems and processes for mitigating them can be made.

Fund Operator: Do you think new regulatory approaches seeking to further integrate ESG evaluations and investments are a sign of things to come? And how will this change the FM industry in the future?

Carolyn: The greater integration of ESG considerations is an unstoppable force. But, at its heart, this is all about governance and that is only just beginning to be appreciated.

The integration of ESG considerations will place a significant governance burden on schemes and it is wrong to think that this is just about TCFD disclosures and/or that only the schemes that are caught by these disclosure requirements need to be concerned.

It is all about getting the governance right and it feels to me that every scheme is going to need a ‘drains up’ review of its investment governance.

This will inevitably impact the FM industry in terms of how FMs interact with trustees and the transparency of what they do, including some of the detail of their terms of engagement – especially around those terms that give trustees visibility and control.

“It is all about getting the governance right”

It is interesting reading the most recent DWP consultation on the regulations to implement the Pension Schemes Act climate change requirements.

There is a strong theme, around trustees being accountable. Trustees are always ultimately accountable, but this somehow feels different. Trustees now need to have a very clear line of sight and understanding of what is happening in relation to their

investments and particularly in relation to ESG so that they can explain, if asked, (and they will be asked because this is the kind of topic that members are interested in as well as activist groups), why they are doing what they are doing.

We all know that investments, can go up as well as down, so whilst the returns are clearly important, they are not within the trustees’ control.

“This requires a more in depth understanding than many trustees have at the moment”

What the trustees can control, though are the processes that they undertake when making their decisions, is the information that they have and their understanding of why they are making certain decisions.

It is critical for trustees to be able to articulate why they have the approach that they do towards ESG.

This requires a more in depth understanding than many trustees have at the moment and will also require robust processes enabling them to interact with managers in ways that they may not be doing at the moment.

Going forwards, there is a need for a different relationship between trustees and asset managers with much greater collaboration needed as both continue to expand their understanding of this rapidly developing area.


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