How to approach fiduciary manager assessment for DB Schemes?

Speaker	Transcript
Helen Norman, Associate – Burges Salmon	[Music] Hi everyone, my name is Helen Norman and I'm an associate in Burges Salmon's Pensions and Lifetime Savings team. I'm joined by Chris Brown, a partner in our team.
Chris Brown, Partner – Burges Salmon	Hi Helen.
Helen	And welcome everyone to our third episode of season five, Burges Salmon Pensions Pod. So in today's episode we'll be discussing fiduciary manager assessment for defined benefit schemes, and our guest today is Peter Dorward, managing director of IC select. Peter has over 35 years experience in investment management and broader Financial Services in the UK and overseas. Peter thanks so much for coming on the podcast.
Peter Dorward, Managing Director at IC Select	Delighted to join you both, thanks very much for the opportunity.
Chris	So Peter, thanks very much for joining us on the podcast. Really looking forward to today's discussion, could you just briefly tell us a bit about IC select, and of course IC select has been part of the IGG family since the start of the year, could you tell us about that and how it's going please?
Peter	Yeah, be happy to, thanks very much. IC Select is an organization that was founded originally in 2007, so we've been around for a long time and in fact the only independent organization that's been around for so long, focused on doing this work within this sector for DB schemes. So we build reputation over that period of time obviously for doing what we do, and what we do well and in January of this year, as you say, we joined the IGG group and that was really an opportunity for us to essentially tackle a number of challenges that we faced as an organization. As a small organization in a market that has some major competitors we've always punched above our weight, but being part of IGG has allowed us to do that much more effectively. In three ways principally, one, is to be able to access a bit of a deeper resource so that we can increase the capacity of the work that we do to be able to access and leverage that resource. Second, we've always struggled I guess as an organization when we're compared with other bigger third party evaluators like PWC or EY or so on, who are major competitors of ours. To be able to access the sort of throughput in terms of prospective clients, accepting that a lot of it comes through referral business from existing clients but to be able to access that prospect universe, if you like. So IGG gives us a bigger brand to sit behind and sit within and obviously gives us opportunities within that to be able to realize our our growth opportunities, I guess to be able to access a broader range of prospective clients. I would emphasize that doesn't it doesn't change the way that we attract business or the way that we can be successful with those prospects to actually turn them into clients, because we're not in anyway a shoo-in for those IGG clients. They go through the same process of tender and selection and so on, but it means that we get more visibility of those opportunities. The third aspect is technology, for us to be able to continue to do what we do in the way that we do it with the same sort of level of quality for clients, we need to make it more efficient. A lot of what we do is very manually intensive, so to be able to use tech to be able to suck data down, to crunch data, to produce reports, and then use our in intel to be able to add value within those reports is an essential element of being part of IGG as well. Going really well.
Chris	Good.
Peter	And in all of those areas thank you.
Chris	Ah fantastic, well glad to hear it's going really well with with IGG, and that's brilliant really looking forward to our discussion today. So Helen, over to you to kick things off.
Helen	Yes, so today we discussing fiduciary manager assessment and there's obviously a regulatory requirement for defined benefit trustees to formally review their investment advisor, ensuring these advisor are appropriately qualified and the performance is being regularly reviewed to meet the needs of the scheme. Peter could you tell us a bit more about that background?
Peter	Yeah, the foundation of this I guess is from the CMA final orders in July, I think, of 2019.
Chris	That's right.
Peter	And obviously this builds on the obligations of the Pensions Act '95 for trustees, to ensure that trustees are able to demonstrate that they're testing and reviewing the ongoing suitability of their advisors. But the CMA final orders laid down a more stringent requirement, to move away from this, I think you used the phrase earlier actually Chris, move away from this issue of advisors setting and marking their own homework, to allowing trustees the ability and the tools to be able to challenge their advisors independently and not just roll over and accept the advice that they're provided with, but be able to challenge in a much more effective way. So the CMA orders lay down a requirement in December of that year, of 2019, for all trustee boards to have in place objectives for their investment advisors. And when we say investment advisors in this regard we mean investment consultants, in the sort of standard conventional way, as well as the advice side of fiduciary managers and what fiduciary managers are having to deliver for those clients.
Chris	And just, Peter, just jumping in there, there is a point there around investment consultancy and exactly what that entails. So I should imagine that given the duties have been around for a number of years now, the scope and parameters of them are well known to many trustees, but worth, I suppose, just noting that the regulations say that high level commentary from an actuary on the link between investment strategy and the statutory funding objective is not investment consultancy services, but actually the guidance says that, you know, more in-depth commentary from an actuary could be. So probably the scope and parameters are are well known, but sort of the edges of where investment consultancy services starts and stops is, you know, is not entirely clear cut.
Peter	I would agree and that blurring of the edges I think becomes more profound as time passes, so if you think about the spectrum of delegation, I guess. On one end of that Spectrum you have plain vanilla investment advice provision with the trustees having a big obligation from a governance point of view, to then execute and implement on that on the basis of that advice, and then over to the other end of the spectrum where you've got full delegation. Fiduciary management, now increasingly called OCIO, or Outsourced Chief Investment Officer services, and all of the different levels of delegation in between. So you see more investment consultant firms who are acting as an OCIO to help with implementation but not going the full hog of accepting discretion to implement on the basis of advice. They leave that discretion with the trustees, they are therefore not fiduciary managers, not caught by the requirement to tender and classes in that different way, whereas obviously a fiduciary manager or OCIO with full delegated services will provide advice and will execute on the basis of the advice provision. So yeah, and you're right to call that out, and right for trustees to be more aware of the blurring of the edges. But fundamentally, as I say, the requirement of the order originally, now obviously part of the regulations and the amendment to the regulations as far as scheme admin is concerned.
Chris	The scheme admin regs. Yeah absolutely.
Peter	That's right, by DWP, now governed by tPR, means that there is that mandatory requirement to set those objectives and to measure those objectives as well on an annual basis, and indeed review those objectives on a triannual basis.
Chris	Every three years exactly, and, or if there's significant change in investment policy.
Peter	Correct, yeah correct. And the oversight that we talk about, so IC select stewardship service is it takes this a little bit further and I think that's it's something worth just touching on, to come back to that aspect of what you use it for, how the trustees use this mandatory requirement.
Helen	Just by way of more background, the general code of practice also refers to governing bodies such as trustees engaging with their investment managers in relation to things such as value for money, as well as this regular monitoring of performance, formerly every 3 years and acting upon any issues that are identified, and things such as minutes of trustee meetings you really want an audit trail of trustees being able to consider this, which I guess is where your product comes into play.
Peter	That's right and that whole concept, as I say, of taking the measurements the assessment and the review of strategic investment objectives, or investment objectives as they now referred to, a little bit further. So trustees could use that mandatory requirement to tick a box and say that they've done it, but if you're going to do it to any degree then you might as well do it properly and work out just what and how, and why actually, you're going to utilize that requirement and our view is that the trustee should be using it to raise the bar. So raise the bar in terms of the quality of job that the advisor is doing, advisor again being and investment consultant or fiduciary manager, raise the bar on the quality of the work but also focus on the broader aspects of value for money that you've highlighted Helen, and I think, you know, let's face it the FCA, tPR, DWP are all working hard to try and define what value for money is.
Helen	Yeah.
Peter	On the basis of performance, cost and then the qualitative aspects of service operations and so on. And those three elements are the fundamental foundation of oversight, in our view. So it isn't just about checking suitability, it isn't just about reviewing performance, it is assessing the overall picture of value that the trustees are gaining from the relationship, as well as making sure that they're doing contractually what they're obliged to do as well.
Helen	Peter, I was just going to ask, why do you think it's so significant for the assessment to be independent of these fiduciary managers?
	If you look at, actually historically it's a very short period, but if you look historically as how those - if you have the starting point of the investment objectives setting an assessment, historically because it had to be done so quickly it was being done by the advisor. So the trustees were going to the advisor saying we need to do this by the 12th of December what can you do to help us? And then if you look, as we do, in reviewing those investment objectives that were laid down they are pretty plain vanilla, they are qualitative by nature, they are not measurable. I'm generalizing for this purpose but you get you get the gist. So that starting point is not a good starting point and was never what the tPR intended, although CMA final orders intended, because it doesn't give anything to the trustees that they didn't have before, which is very basic reporting from their advisers. So having an independent view of that means that the objectives are actually assessed on, are reviewed, set, and assessed for the trustees, by the trustees, with the help of an independent organization, like IC select. I guess I would say that wouldn't I? But that element of it, totally independent from what the adviser is saying, is crucial and if you think about it from a, sorry Chris.
Chris	No, no go on Peter, this is really interesting, yeah.
Peter	From a sponsor's point of view, a sponsor will have their own advisor and their own advisor would expect some sort of independent view of how the service provision is actually operating. If all they're getting is an assessment report from the advisor then that just doesn't serve that purpose. So look at the way that SOC reports are done, operations and controls reports are done for fiduciary managers. You could never have a fiduciary manager doing their own SOC report because that would just wouldn't work. This represents, this whole aspect of investment and investment governance, represents something like, generally, 80% of the cost of running a scheme. So that is significant in terms of the what investment will give, or detract from a scheme assets and the ability to meet funding requirements, and ultimately what we're all here for is to make sure the benefits are paid. So if you're not paying that sort of attention and not doing this independently then when would you? If I could if I can put it that way. So that's why that independent view, the ability to be able to step in, really analyse the data, quantitively, really assess from a qualitative perspective those aspects that you need to by an independent organization who knows what they're actually talking about. If you don't do that then you're never going to be able to actually scratch the surface and really see where the skeletons may be hiding.
Chris	Okay, that's ever so interesting and I can see what you're saying about the logic of that. Peter, it's not the case that the law says that trustees need to go out and obtain an independent view, but I suppose what you're saying is how can trustees do that properly without getting a third party view from a firm such as yourselves?
Peter	You're right, it is not a legal requirement to do that, to conduct oversight.
Chris	And I'm not, and by saying it's not a legal requirement I'm not a lawyer saying coming in saying something shouldn't be done, that's not what I mean at all. I'm just sort of trying to frame the trustees decision making with this.
Peter	That's right, but the tPR's guidance is that this should be done. The tPR's guidance is that you need to check suitability, you need to check and review your investment objectives and assess them, and what is coming over the hill is that there will be a requirement at some point on DB trustees to check value for money, so why not get ahead of that particular game? But the tPR also states that the preferred approach is to use an independent organization to be able to do that and not to rely on the advice of their advisor to do that.
Helen	And I guess it's very scheme specific so tPR's guidance says that there can be a level of proportionality to consider, so in developing, it says in developing and performance monitoring and assessment approach trustees should take a proportionate approach that's appropriate for their scheme and the governance structure and investment arrangements that they implemented.
Peter	That's right.
Helen	So Peter, we've talked about why trustees should be doing this but can you give our listeners a flavour of what trustees should hope to achieve from this independent assessment?
Peter	Yeah so, peace of mind in many senses. You know, you've got trustee board sitting around the table trusting their advisor, trusting their fiduciary manager, particularly because they're not just providing advice but they are then implementing on the back of that advice. So the trustee is not abrogating responsibility to ultimately invest the assets prudently and to pay the benefits, but they are delegating a lot away and therefore have to develop a lot of trust in their advisor, so peace of mind is is one key element of that aspect of it. And in addition to that though, you have a market that is dynamic in the way that it evolves. So for a trustee board to be able to understand how their fiduciary manager is behaving compared with others, how they're performing when compared with others, and how their costs sit when compared with others, are all very tangible aspects of what trustees should be considering. So that would be, from a performance point of view, looking at the GIPS fiduciary management performance standard as a way to compare the actual performance of their scheme by that fiducial manager, as well as the fiduciary manager itself in the wider context of the market. Incidentally as an aside, that's a standard that IC Select developed a number of years ago and then passed, in 2019, passed to CFA Institute as an independent organization to then develop it as part of their GIPS standard.
Chris	How interesting.
Peter	Something we're very proud of I have to say.
Chris	Understandably yeah.
Peter	So performance, and that is the whole portfolio performance as well as component parts, which we would look at a different type of universe for the growth assets, for instance, to look at how that performance compares with, let's say, a diversified growth fund universe providers. The cost side of that benchmarking.
Chris	Yes.
Peter	We base on our our own survey of fees which we we release in September/October each year, based on our foundation, our due diligence of fiduciary managers, which gives a slightly different complexion of cost comparison. And then you look at behaviourally how they're, what they're doing. So how dynamic are they, how creative are they, how active are they, in provision of advice for trustees, to make sure that the trustees are able to lift their heads up actually and see what's going on on around them, rather than just being in their bubble that is that fiduciary manager. But fiduciary managers are beholding to make sure that trustees are able to do that, and do that effectively. We base on our our own survey of fees which we we release in September/October each year, based on our foundation, our due diligence of fiduciary managers, which gives a slightly different complexion of cost comparison. And then you look at behaviourally how they're, what they're doing. So how dynamic are they, how creative are they, how active are they, in provision of advice for trustees, to make sure that the trustees are able to lift their their heads up actually and see what's going on on around them, rather than just being in their bubble that is that fiduciary manager. But fiduciary managers are beholding to make sure that trustees are able to do that, and do that effectively.
Helen	And is there a set time when this should be conducted? For example, if we have clients where they've only just appointed their fiduciary managers, or they've only been in place for a year, do you think there's any merit in delaying the review until year two or year three or should be trustees really be acting now?
Peter	Two aspects to that I think, one is, and this is in terms of that ability for a scheme to afford oversight. So oversight generally will cost around four/five basis points.
Chris	Right.
Peter	So about, you know, on a 30 million pound scheme that would be about 12,000 and that would be 12,000, depending on how much of the oversight service they want, that's the basic standard. So can they afford it? That has to be the first question.
Helen	Yep.
Peter	Yep. Should they do it, if they can afford it, right at the start and put that in place? And actually before then, should they consider it as part of determining what their requirements are from any tender process that they may go through to appoint - select and appoint a fiduciary manager, it has to be part of that overall governance discussion. So assuming they can afford it, then our recommendation, you would say that we would say this I guess, but our recommendation is always that they should put it in place as soon as the contracts are signed and executed. Again, there are two elements of that actually, because one they have to have their strategic investment objectives framework of assessment in place, at the point that is executed, so that has to be in place. But the broader oversight allows you to see whether the broader relationship, and all of its aspects, are working. Not just performance, but reporting, relationship, operations, execution, are all working as they should be working. If you wait two or three years down the line then it's already cost you and it could already cost you then to actually go through another tender process because the relationship is broken, and I have to say we've seen this time and time again where we've gone in two or three down years down the line, haven't been involved in the tender process have been asked to come and have a look, and you've got a board of trustees who are just hacked off with the relationship because it isn't working. If you were able to nip in the bud those sorts of challenges right at the start then it doesn't get there. So you're you're able to, the trustees are able to understand that in a year's time they're going to get a detailed comprehensive report on what's gone on in the last 12 months, or the first 12 months in that case. They will then be able to determine, through the analysis and through the qualitative findings, what they should have in place as an action plan to make sure that things are improved if things need to be improved, fees are challenged if fees need to be challenged, and so on, to make sure that is a healthy relationship that goes forward. And again, you know, if a trustee board goes back to a sponsor and says actually things are not quite working out as they should be, then to be able to demonstrate that they've done everything in their power to make sure that it works right from the start, is a really important element of that. And that's why fundamentally we believe that is important right for the start.
Chris	Peter look, that's really helpful, thank you for that sort of thorough description and detail there. I think Investments are complex requirements on trustees to review, set objectives, tender for fiduciary managers, all of that is complex and you can see trustees thinking well actually an independent review of my investment consultants fiduciary managers is, you know, is is really really helpful. So we've talked about performance costs, a benefit of knowing the sort of quality of investment reporting. If you were to leave our listeners with sort of just two or three, or sort of a brief summary of the benefit of this independent reviews such as IC Select's oversight then what would your sort of two or three takeaways for our listeners be?
Peter	I think, if you think about it is raising the bar.
Chris	Right.
Peter	So it allows benchmarking against the best in the marketplace, it allows clarity and transparency around assessment to really get to the nub of what's going on, and it allows the trustee to take control of what what's next. So the recommendations, the action plan of what ensues over the following 12 months to be actioned before the next report, and importantly that aspect of suitability and the understanding that you need to really understand these organisations inside out to understand that they are suitable, and continue to be suitable to provide that reassurance and peace of mind for trustees.
Helen	Thanks so much Peter. That's really really helpful to have you on the podcast and definitely an area that we haven't explored before on an episode, so thank you.
Peter	Thank you, I really enjoyed it.
Chris	Peter, my thanks as well, thank you ever so much for coming on. I was just going to say, Helen, worth us probably just ending on your reflection, which I think you made at the start, which is that the trustees approach, we, and I think Peter I hope you would echo this as well, we'd recommend documenting any key decisions and how they're made and I'd imagine, Peter, your advice would be a large part of that. But if trustees document their approach in meetings and minutes, or perhaps a standalone document, then that's important to, as you said, at the top, Helen, show that audit trail of compliance for the purposes of the regulations and the regulator's guidance.
Peter	Yeah I would agree. Can I just make a separate point about that?
Chris	Yeah, please do.
Peter	We are often asked by trustees to consider - they will often be unhappy with how proactive a fiduciary manager will be. So they will, as part of oversight, they will say can you just have a look at that? The only way you can look at that is to look at advice papers and what recommendations have actually gone to the trustee board from a fiduciary manager and how that has then been executed, how many have been accepted and executed for areas when delegated away? And unless what you suggest around minutes are really clearly documented around decisions then it's very very difficult, and it's, there are very few cases where that sort of rigor is applied in how decisions are actually reached within minutes, which astounds me sometimes actually.
Chris	I mean, I agree I think being able to evidence that compliance is really really important for trustees, so whatever their approach I think that's a very key thing for trustees to do. Well, thanks ever so much Peter for coming on the podcast, a really interesting discussion today.
Helen	[Music] Thank you for listening to the Burges Salmon Pensions Pod. Our next episode will cover the Autumn Budget. If you'd like to know more about our Pensions team and how our experts work with you can contact myself, Chris, or any of our team via our website. All of our episodes are available on Apple, Spotify, or wherever you listen to your podcast. Don't forget to subscribe and thanks for listening. [Music]