The range of investment options for pension schemes has become increasingly complex over the past few years, and trustees have the unenviable position of trying to keep up to speed with new and innovative developments. With the realisation that many trustees don’t have the time or required expertise to fully benefit from the range of investment options available to them, we are seeing an increasing number of schemes looking to fiduciary management to solve their investment challenges.
However, many trustees are confused or skeptical about the benefits of using a fiduciary or delegated approach to managing assets and when to consider it.
Brexit has caused significant headaches for trustees and sponsors. With gilt yields falling to historic lows and market volatility, most schemes are facing increased deficits and greater reliance on the sponsor. It is more essential now than ever before that trustees have a governance structure in place that can react to changes in both the short term and midterm to take advantage of opportunities that present themselves and avoid pitfalls.
Given decisions on hedging levels, de-risking and even asset allocation need to be much more dynamically managed than previously, an increasing number of trustees are delegating some of the decisions they previously made themselves to an advisory firm.
Although some trustees are concerned that delegating decisions to a third party would cause them to lose control, the reality is that this move usually helps them achieve greater control over their investments because a specialist can look after their interests on a daily basis, rather than around a quarterly meeting schedule. Greater control is clearly required in an uncertain and volatile environment.
The initial approach to fiduciary management typically involved a pension scheme delegating all aspects of decision-making to the fiduciary manager. However, the fiduciary model has evolved significantly, and trustees now increasingly seek help with specific areas of their investment portfolio rather than total scheme governance. They can choose the aspects they wish to delegate and those decisions they wish to retain. This move from a “one size fits all” to a bespoke approach for each client has helped increase the use of fiduciary management within the UK.
The first fiduciary management appointments have now been in place for over five years, providing meaningful track records on whether fiduciary management has actually delivered.
In the case of Mercer’s first full fiduciary client in the UK, when the client switched to a fiduciary approach its 60% allocation to growth assets was retained, but its interest rate hedging was significantly increased, thus reducing overall risk in the portfolio.
Mercer had agreed funding level triggers with the client. The funding level was monitored daily, and when a trigger was reached, assets were switched from the growth portfolio and invested in matching assets to further lower the funding level volatility. Since inception, the client has seen growth assets reduce from around 60% to 20%.
During its fiduciary journey, the scheme has experienced a 75% reduction in risk, and its overall funding level has increased by over 20%. The client is now working with Mercer to consider a buyout and finish the journey it started.
In conclusion, the continued time and governance challenges faced by trustees, coupled with the increased uncertainty of future events