The key trends impacting the fiduciary management market
ESG, fee pressure and increased tendering are the three core trends driving change in the fiduciary management market, says Ciprian Balan, Investment Governance & Oversight Manager, EY
Fund Operator POSTED ON 7/25/2021 5:19:06 PM
Over 2020 we continued to see increased fiduciary manager tendering activity in the market. This was primarily driven by the CMA requirements, but also by the intention to explore alternative investment governance solutions that can hold up in times of significant market volatility.
The CMA had previously concluded that there is an unwanted effect on competition in the FM markets.
Pension plans who have appointed a fiduciary manager to manage more than 20% of the scheme’s assets without running a formal tender exercise, are now required to run a competitive tender process for which the deadline is June 2021.
We have been focusing on helping our clients meet this statutory deadline.
"In the last year we have worked with many schemes who wanted to assess the effectiveness of their existing investment governance model."
Whilst the CMA-driven re-tendering activity has been significant, we have also been working with pension schemes that were operating under a fiduciary framework and wanted to re-tender despite not being subject to the CMA requirements.
It is good pension scheme governance practice to run market testing exercises to understand what other fiduciary solutions are available.
In the last year we have worked with many schemes who wanted to assess the effectiveness of their existing investment governance model and gauge what the advantages and disadvantages of using a different framework might be, including the implications of delegation of investment decision- making.
This interest we have seen in fiduciary management from clients has often been driven by the volatile market conditions over 2020, which really tested the fiduciary managers’ risk management toolkits.
"It is those fiduciary managers who constructed genuinely diversified portfolios and successfully implemented downside risk protection techniques who achieved better results"
We have seen some real success stories in terms of investment performance achieved within fiduciary portfolios over the last year.
It is those fiduciary managers who constructed genuinely diversified portfolios and successfully implemented downside risk protection techniques who achieved better results for their clients over this period of market stress.
As third-party evaluators, we are supporting our clients in understanding the performance achieved by their fiduciary managers on an ongoing basis.
We typically look at performance through multiple lenses; relative to benchmark, investment objective, risk levels and relative to other fiduciary managers.
"DWP is now in the process of mandating climate-related disclosures for large pension funds"
We have observed a range of investment outcomes being achieved by fiduciary managers over the last year.
Another trend that we have observed is the significant regulatory momentum associated with ESG investing.
From 1 October 2019, pension scheme are required by the DWP to include their policies in relation to financially material factors, including ESG factors (and specifically climate change) within their Statement of Investment Principles.
DWP is now in the process of mandating climate-related disclosures for large pension funds. This could eventually end up being applicable to all schemes, irrespective of size.
This type of reporting first requires trustees to take several actions around integrating climate change into the pension scheme’s risk management strategy.
"The industry is more engaged with ESG"
Only after taking these actions, trustees would be in a position to meaningfully report on climate change.
The industry is more engaged with ESG. Fiduciary managers offer clients a wider range of solutions to help them achieve their ESG ambitions and through our research we have observed a variety of approaches towards integrating ESG within investment processes be that portfolio construction, manager selection or investment strategy setting.
EY recently carried out a survey which found that the majority of trustees of pension plans consider ESG integration to be complementary of their fiduciary duty to always act in the best interest of the members.
"There is now growing academic evidence to support that embedding ESG considerations into investment decision-making leads to better member outcomes."
In addition to the regulatory requirements and reputational risk of doing nothing, there is now growing academic evidence to support that embedding ESG considerations into investment decision-making leads to better member outcomes.
Another market trend I will mention, is the increased competitive pressure on the fees charged under fiduciary mandates.
This is a by-product of the number of FM offerings in the market, as well as the significant variation amongst the solutions available.
Different fiduciary managers have different investment philosophies, having a knock-on impact on the investment products used, investment processes and ultimately on fees.
Other new reporting requirements, such as MiFID II, helped improve the transparency in the FM industry.
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