Aon Hewitt Delegated Consulting Services. Fiduciary Management Survey Risk. Reinsurance. Human Resources.

Transcription

1 Aon Hewitt Delegated Consulting Services Fiduciary Management Survey 15 Risk. Reinsurance. Human Resources.

2 Table of contents Executive summary...3 Key findings...5 Section 1: Continuing growth in take-up of fiduciary management...6 Fiduciary management among large schemes increases...6 Section 2: Drivers of growth...9 Flight plans continue to increase in popularity... Investment complexity continues to increase... Scheme closures leading to greater focus on end goals...11 Section 3: Benefits of fiduciary management...13 Improved nimbleness with fiduciary management Fiduciary management enables greater investment diversity...15 Perceived disadvantages Section 4: Excellent results from fiduciary management...17 Section 5: Fiduciary provider selection process...19 Criteria for selecting a provider Considering performance vs unique objectives.... Fiduciary provider preferences...21 Selection process...23 In-house or external investments?...24 Paying for fiduciary management Monitoring fiduciary management Section 6: What are DB pension schemes really concerned about?..27 Section 7: About the survey and respondents...28

3 Executive summary This is Aon Hewitt s sixth survey on fiduciary management of defined benefit (DB) pension schemes. It remains the largest and longest-running survey in the UK pensions industry on this area of the market. Its six year history, large scale and focus on users rather than providers, makes it unique. Based on around 23 responses, with 89 from pension scheme representatives such as trustees and pensions managers, Aon Hewitt s survey covers an estimated 181 billion of assets, representing over of the DB pension market in the UK. The survey includes 66 schemes using fiduciary management, covering an estimated 6 billion of assets. The results show that demand for fiduciary management solutions continues the upward trajectory we have seen in previous surveys. Use of fiduciary management, which we define as the delegation by trustees of the day-today investment decision-making and implementation to third-parties, is becoming business as usual for a growing proportion of the UK s pension schemes. The survey examines trends and developments within fiduciary management and provides expert analysis and practical advice on issues such as provider selection and performance. We would like to draw your attention to some of the main highlights from the survey, which are covered in more detail in the key findings on page 5, and then in further detail within the survey itself: 1 Growth continues: largest increase among large schemes Take-up rates among respondents have once again increased, from 18 in 11, to 37 in 14, and are now at 46 in 15. Increases in take-up rates have been seen particularly among large schemes; 51 of respondents with 1bn or more in assets now have full or partial fiduciary management. Overall, large schemes are more likely to have a partial fiduciary solution (where a provider is appointed to manage a proportion of the scheme s assets) and smaller schemes are more likely to have a full fiduciary mandate (where all of the scheme s assets are managed by the provider). The future for many schemes. Survey respondent quote 2 Continued vote of confidence: 98 satisfaction Fiduciary management once again gets a resounding vote of confidence from schemes using this solution. 98 say their overall experience is excellent, good or satisfactory, 97 say the same about client service and 96 say the same about the impact on their funding level. (Fiduciary management) works very well. Survey respondent quote Aon Hewitt 3

4 3 Increased investment complexity and trustee pressures are driving growth The increasing number and complexity of the investment options trustees face continue to fuel fiduciary management growth. In particular, the take-up of liability-driven investment (LDI) has grown significantly in recent years; this approach requires substantial oversight and expertise. Trustee and sponsor time remains at a premium; schemes without fiduciary management are struggling to dedicate the time they need to investment matters. The combination of time pressure and investment complexity makes delegation of scheme investment to experts an increasingly attractive proposition. 4 Face-to-face interaction is key to selecting a fiduciary provider The right fiduciary management solution and the right provider will be a very individual decision for schemes. Each scheme has different objectives, challenges and priorities; selecting a suitable provider therefore needs to be a hands-on, informed process. 74 of respondents would use face-to-face interactions to select their fiduciary provider (beauty parades and/or site visits). Overall, the 15 survey shows that fiduciary management continues to grow and is becoming increasingly embedded as a viable investment solution for schemes of all sizes. High levels of satisfaction are maintained, as schemes realise the benefits of an agile investment approach overseen by experts. Increasing complexity and choice in the investment market continues to drive this growth. Fiduciary management described by respondents As in our 14 survey, we asked respondents to describe fiduciary management in their own words. Two-thirds took up the challenge and the vast majority gave accurate and well-informed descriptions, reflecting a generally high level of awareness and knowledge (which has grown in the last six years). This free text answer did not only include definitions but also general commentary and thoughts on fiduciary management. We have therefore included a selection of quotes from respondents descriptions throughout this report. Sion Cole Partner and Head of European Distribution Delegated Consulting Services, Aon Hewitt For me, fiduciary management is the delegation of tactical investment management activities to the experts. While our investment committee works well and do their best, they do not fully understand the complexities around today s investment products, nor can they react quickly enough in what is an increasingly volatile market place. Survey respondent quote 4 Fiduciary Management Survey

5 Key findings Section 1: Continuing growth in take-up of fiduciary management Take-up rates have more than doubled, from 18 in 11, when we first asked if respondents had appointed fiduciary providers, to 46 in 15. The strongest growth from has been among schemes with 1 billion or more in assets. Full fiduciary management remains more common among pension schemes with assets of 5 million or less, while partial fiduciary management is more frequently found among schemes with assets of 1 billion or more. Section 2: Drivers of growth Increasing time pressures mean 69 of trustees are spending five hours or less a quarter on investment matters. Trustee governance time is the third most important factor in the decision to appoint a fiduciary provider. Utilisation of complex investments and tools, particularly liability-driven investment (LDI), has risen again since last year. 58 of schemes now use LDI as part of their investment solution. Section 3: Benefits of fiduciary management Investment expertise and daily attention to risks and investments are seen as the top two advantages of fiduciary management. Cost and difficulty in comparing providers are cited as the main concerns. Respondents with fiduciary providers are more satisfied with the speed of their scheme s decisionmaking than those without; 81 of those with a fiduciary solution believe that decisions are made at the right speed. Respondents believe that fiduciary management improves speed and agility, with nimbleness moving up the list of advantages this year. Section 4: Excellent results from fiduciary management Fiduciary management once again gets a resounding vote of confidence from schemes using this solution. 98 say their overall experience is excellent, good or satisfactory, 97 say the same about client service and 96 say the same about the impact on their funding level. Section 5: Fiduciary provider selection process All respondents opt for a combination of methods to select their fiduciary provider. 74 of respondents would take a face-to-face approach to selecting their fiduciary provider. This includes 65 opting for using a beauty parade and 35 opting for a site visit with their provider. A proven track record remains the most important quality indicator when selecting a provider. The majority of respondents prefer to measure the success or failure of a fiduciary provider by comparing the performance of their solution versus their scheme s bespoke investment objectives, rather than versus an industry-wide benchmark. A third of schemes would choose their existing investment consultant s organisation as their fiduciary provider. A fiduciary arm of their actuary s organisation is the second most popular choice, cited by 25. Section 6: What are DB pension schemes really concerned about? Scheme deficits, volatility of assets, the effect of yields and interest rates on liabilities and better matching of assets for liabilities were some of the most common concerns cited by our respondents. This reflects the challenging conditions and increasing pressures being faced by defined benefit pension schemes. Schemes with fiduciary providers enjoy more diversified portfolios than those without. Aon Hewitt 5

6 1. Continuing growth in takeup of fiduciary management The 15 survey shows that an ever-increasing number of schemes are choosing fiduciary management as their investment solution. 46 of respondents to this year s survey have a fiduciary solution in place. 33 of these have a full fiduciary mandate (where a provider manages all of the scheme s assets) with a further 13 having a partial fiduciary solution (where the provider manages a part of the scheme s assets; a single asset class, for example). A further 11 are planning to explore fiduciary management. This shows an increase from the 14 survey, where 37 had a fiduciary solution in place, and from when we first asked this question in 11, where only 18 had adopted such an approach. The number of schemes with a full fiduciary mandate is also increasing, up from 27 in 14 to 33 in 15. Only 13 have not yet considered a fiduciary management solution. 17 state that, while they have considered and previously decided against fiduciary, they may reconsider that decision. Key finding 46 of schemes now have some form of fiduciary management, compared to 18 in 11 and 37 in 14, showing continued strong growth in the fiduciary market. Take-up of fiduciary management Not considered yet 13 Decided against it, unlikely to reconsider 13 Full fiduciary management 33 Decided against, may reconsider 17 Planning to explore 11 Partial fiduciary mandate 13 Number of respondents: 142 Fiduciary management among large schemes increases Among large schemes (those with 1bn or more in assets), 51 have either full (23) or partial (28) fiduciary management. This figure has increased significantly since the 14 survey, when 22 of large schemes had some form of fiduciary solution in place. 43 of small schemes (which we define in this survey as schemes with m assets or less) have either full (38) or partial (5) fiduciary mandates in place. For medium-sized schemes (defined as those with assets between 1-1bn), this rises to 47, with 36 having full fiduciary and 11 partial. As in previous years, smaller and medium-sized schemes are most likely to have a full fiduciary mandate. Of those respondents with full fiduciary, 34 are small and 49 mid-sized; 17 are large schemes. Useful for larger schemes with lower funding levels. Survey respondent quote 6 Fiduciary Management Survey

7 Take-up of fiduciary management by size Key finding of large schemes (those with 1bn or more in assets) have either full or partial fiduciary management. This figure has increased from 22 in the 14 survey Total (all schemes) m 1m 1bn More than 1bn Number of respondents: 7 (15) Fiduciary management take-up by mandate type and size Full fiduciary management Partial fiduciary mandate Planning to explore Total (all schemes) m 1m 1bn More than 1bn Number of respondents: 142 Fiduciary management take-up by status With fiduciary Without fiduciary Focused, disciplined, process oriented approach, that takes into account independent and expert investment management advice. Survey respondent quote Schemes that are closed are more likely than open ones to have adopted a fiduciary management solution. Those closed to both new entrants and future accrual are most likely to have a fiduciary mandate. While 33 of schemes that are open to new entrants have fiduciary management, this figure rises to 38 for those closed to new entrants and 56 for those closed to future accrual. Open to new entrants Number of respondents: 227. Excludes do not know Closed to new entrants Closed to all future accrual Aon Hewitt 7

8 Aon Hewitt perspective With the ever-increasing challenges facing pension schemes trustees and sponsors, it is not surprising that the take-up of fiduciary management continues to grow. The more than doubling since 11 is reflective of what we are seeing within our own fiduciary business and of other industry estimates. The number of schemes with a fiduciary solution in place is still dwarfed by the total number of DB schemes in the UK, representing around just 5 (by assets). However, we see the number of schemes continuing to increase in the future, and likely to reach a potential peak at around - 25 in the next five years. The question of what size scheme is most suited to fiduciary management is one we are frequently asked. However, there is no set answer to this question as we believe fiduciary management is very much a bespoke solution, designed to meet each scheme s unique needs. Fiduciary management is often perceived to be used only by smaller schemes, which are able to benefit from the greater diversification and implementation of a get busy strategy within a low cost and efficient framework (something previously only possible for the largest schemes). While the survey shows this remains the case, with full fiduciary management most common among schemes under 5m, recent growth in take-up has actually been among the mid-sized and larger schemes. Since 11, take up of full fiduciary solutions has been greatest among the mid-sized schemes ( m- 1bn). We are seeing these schemes recognising the benefits of delegating the day-to-day decisions and management of their portfolio to investment experts, allowing the trustees to focus on the key strategic decisions that will drive the performance of their scheme toward their end-goals. Furthermore, and linked to our own experiences during conversations with clients over the past months, the survey results show that the number of large schemes ( 1bn and greater) investing in fiduciary solutions (either full or partial) has increased vastly since last year. Fiduciary solutions have evolved significantly since coming to the UK and there is now a greater spectrum of solutions available, both between providers and within providers, depending on the scheme itself. This means there is now a wider range of much more bespoke solutions available to large schemes; such as incorporating their in-house team within the fiduciary solution or decision-making process, and bespoke solutions taking into account investment beliefs or unique restrictions. There is not much change in terms of the split between full and partial solutions, with around 75 of schemes appointing their fiduciary provider for a full fiduciary mandate. At Aon Hewitt, the majority of our clients have traditionally undertaken a full fiduciary solution, although this has shifted slightly over the past year toward some more partial solutions for larger schemes. It will be interesting to see if this changes at all in the coming years as the evolution continues and as the influence of large schemes on full and partial solutions available increases. 8 Fiduciary Management Survey

9 2. Drivers of growth It is interesting to explore in more detail some of the key drivers behind the growth seen in the fiduciary market during the last year. The key drivers vary slightly for those with and without a current fiduciary mandate. While expertise in decision-making is seen as the key reason across the board, the speed of implementation is seen as the second-most important driver for those who already have a fiduciary approach. For those without fiduciary management, the certainty of reaching their end goal is seen as the second most important consideration. Key finding 69 of trustees spend five hours or less per quarter on investment matters. Trustees spending limited time on investment 69 of respondents say that their trustees spend no more than five hours a quarter on investment matters. This is similar to the past two years (67 in 13 and 73 in 14). Trustees time spent on investment matters hours 6 - hours 11 - hours 21-5 hours 5+ hours Number of respondents: 149 The survey also asked respondents how many hours per quarter their investment committee spent on investment matters. The findings show interesting differences between those with and without fiduciary solutions. 21 of those with a fiduciary mandate spend five hours or less a quarter on investment matters, while only 12 of those without fiduciary management say the same. The number of hours spent on investment matters is significantly higher for those investment committees that do not have a fiduciary mandate in place. Delegation of investment is having a clear effect on the amount of time trustees and investment committees need to devote to the day-to-day investments and management of the portfolio. Managing investment strategy automatically without involving trustees in onerous paperwork and governance. Survey respondent quote Aon Hewitt 9

10 Investment committee time spent on investment matters With fiduciary 5 43 Without fiduciary Key finding 66 of schemes with fiduciary management have a flight plan in place Control of the investment portfolio. Survey respondent quote - 5 hours 6 - hours 11 - hours 21-5 hours 5+ hours Number of respondents: 3 Related to this, trustee time is the third most cited reason in the decision to appoint a fiduciary provider (see page 11); this was also in the top three reasons in the previous survey. Flight plans continue to increase in popularity We define flight plans for pension schemes as systematic plans or programmes for dynamic de-risking as schemes reach pre-agreed triggers, such as particular funding levels. Previous surveys have shown a rapid increase in the use of flight plans. The 15 survey has seen this level off, partly perhaps due to the survey sample (in terms of the size and types of scheme that participated). In 15, 55 of respondents have a flight plan. The results still show a strong correlation between fiduciary management and flight planning: 66 of those with fiduciary management have flight plans, as opposed to 47 of those without. 31 of respondents without flight plans are intending to explore their potential, signalling further growth is still to come in flight plan take-up. An investment tool to allow trustees to set triggers and goals to de-risk pension schemes. Survey respondent quote Investment complexity continues to increase Continuing a trend seen in the past few surveys, investment continues to grow ever-more complex. In particular, liability-driven investment (LDI) has experienced a large increase in take-up with a 11 increase in absolute terms since the 14 survey (or 23 if you consider the relative increase). 58 of schemes surveyed now take a liability-driven investment approach, compared to 47 last year. LDI can be seen as a challenge for schemes that have not previously taken this route, requiring expertise in understanding liabilities and detailed advice on how to implement this. The increasing demand for and take-up of LDI can therefore be seen as a key driver for delegated investment. Although the asset classes in which schemes invest have otherwise stayed largely the same as in the 14 survey, there are some interesting shifts. Equities remain the most widely invested-in asset class, with corporate bonds and gilts both reducing slightly in popularity. Hedge funds, commodities, infrastructure and private equity have all increased in popularity since the last survey: all of these can be complex to manage and to oversee. The need for strong governance, time, expertise and keen oversight of these investments is clear. This supports the other survey finding that the main factor cited for choosing a fiduciary solution is the desire for expertise; a quarter of respondents claimed that this was their main reason for going down a fiduciary route. This was also the top reason given in the 14 and 13 surveys (see page 11). Fiduciary Management Survey

11 Asset types 95 Key finding Increase in holdings of complex investments. Schemes investing in LDI risen further The ability to delegate investment strategy to experienced managers to implement as appropriate. Equities Corporate bonds Gilts Liability driven investment Real estate Hedge funds Other fixed income Infrastructure Private equity Commodities Other Survey respondent quote Number of responses: 92 (163 respondents) Scheme closures leading to greater focus on end goals Those with closed schemes were asked if they were targeting particular end goals. 87 said they were, an increase from 8 in 14. Across all respondents, the largest number (94) are targeting full funding, 9 of these within the next 15 years. As respondents could choose more than one answer, 35 said they had the ultimate aim of self-sufficiency and said buy-out. Factors in decision to appoint a fiduciary provider We separately asked respondents about the key factors in the decision to appoint a fiduciary provider. As already mentioned, expertise remains top with flight planning and dynamic derisking second. Flight plan and de-risking challenges has increased as a concern over the last 12 months; in 14 it was the fourth-placed option. Trustee governance, speed of implementation and certainty of reaching end-goal all saw very similar levels of importance. Speed of implementation has dropped in importance since last year, fourth-placed with 12 in 15, as opposed to second with 16 in 14. Related to the increase in schemes targeting specific end goals, certainty of reaching end goal has increased in importance, up from 7 in 14 to 12 this year. Factors in decision Number of responses: Expertise in decision-making Flight plan and de-risking challenges Trustee governance time Speed of implementation Certainty of reaching end goal Scheme funding level volatility Risk/return trade-off 5 4 Discounts through bulk buying Time to reach end-goal Do not know 1 1 Other Aon Hewitt 11

12 Aon Hewitt perspective Fiduciary management is one of the investment and governance solutions available to trustees to help them address the challenges they face in order to meet their end goals. The significant growth in fiduciary management is being fuelled by four key aspects; pressure on trustee time, increasing investment complexity, the incorporation of flight plans and scheme closures. The governance burden on trustees has never been so great. The changes in pensions regulation and increasing range and complexity of investment options has led to significant pressures on trustees time. Trustees are still spending a limited amount of time on investment, which makes fiduciary management even more applicable as it means trustees can focus their time on strategic investment matters; they delegate the day-to-day management of the portfolio to their fiduciary provider. It is therefore not surprising that trustee governance features so highly on the list of factors for adopting a fiduciary solution. It is also interesting to see a significant difference in the time investment committees spend on investment matters; those with fiduciary management spend less time, as the fiduciary provider relieves some of this governance burden. Investment committees time is freed up by the fiduciary provider for a number of reasons; holistic reporting at the overall portfolio level versus liabilities, the provider is responsible for selecting, monitoring and changing managers, as well asset allocation and the day-today management of the portfolio. As the challenges facing trustees have increased, so has the range of potential solutions to help address these. As highlighted by our survey, the use of more complex asset classes and tools, like hedge funds, commodities and LDI, are becoming more mainstream. LDI in particular has seen a huge increase in take-up over the past two years and our survey shows that over half of respondents now have this within their portfolio. However, increasing investment complexity and number of investments also means greater pressure on trustee time and expertise. These types of investments require greater understanding and training, and they also mean additional managers to select, monitor and review. Expertise remains one of the key factors in the decision to appoint a fiduciary provider and is also, as discussed in Section 3, seen as the main benefit of such an approach. Demand for flight plans remains high with a large number also planning to consider implementing these in the future. There is a strong link between the use of flight plans and fiduciary management, with our survey showing 66 of schemes with fiduciary management have a flight plan in place. This is most likely due to the operational complexities and costs associated with implementing flight plans; it is more efficient to do so as part of a fiduciary arrangement. For many schemes, it would be difficult to identify between trustee meetings if de-risking opportunities had taken place, much less to be able to take the swift action needed to move assets from growthseeking to liability hedging in order to capture them. Implementing a flight plan alongside a fiduciary solution can mean quicker implementation of changes so that opportunities to de-risk are not lost and gains are locked-in. The use of flight plans therefore remains a key factor when deciding whether or not to appoint a fiduciary provider. Industry sources suggest over 8 of UK DB pension schemes are closed. While fiduciary management is not just for closed schemes, it is more common among those schemes closed to new members and/or future accrual. Those schemes have a finite time to reduce any deficits and reach their end-goals; thereby emphasising the importance of setting and implementing an appropriate investment strategy that will realistically get you to where you need to be, in time. The vast majority of closed schemes surveyed are targeting specific end-goals, something that has also increased from last year. 12 Fiduciary Management Survey

13 3. Benefits of fiduciary management As in previous years, the survey explored fiduciary management s advantages. Respondents were asked to identify up to three key advantages of fiduciary management. As has been the case for the past few years, investment expertise is seen as the main advantage of a fiduciary approach, with 58 citing it as a key benefit. The ability to provide daily attention to risk and investments was the second most-cited (52) with nimbleness the third-placed advantage (34). Key finding Investment expertise (58) and daily attention to risk and investments (52) are seen as the two key advantages of fiduciary management. These findings are very similar to those in the previous survey. The main difference was an increase from 43 to 52 of those citing daily attention to risk and investments, as well as nimbleness moving up the list from fourth to third. The three most frequently-mentioned advantages all have one common element; expertise. This links in to the main reasons for deciding to appoint a fiduciary provider on page 9. Interestingly, those with fiduciary management are more likely (63) to cite investment expertise as an advantage than those without (59). This suggests that those with a fiduciary mandate already in place are experiencing and appreciating the benefits associated with external investment expertise and the ability to act as opportunities arise. Great for trustees that lack the time/interest/ability to be too actively involved or for smaller schemes who want to access investment solutions that would otherwise be unavailable to them. Survey respondent quote Advantages Disadvantages Investment expertise 58 Cost 62 Daily attention to risk/investments 52 Hard to compare providers 39 Nimbleness 34 Conflicts of interest 39 Bespoke/tailored solution 32 Governance 29 Better understanding of strategy 28 Complexity 28 De-risking 28 Loss of control by trustees 28 Diversification 18 Fiduciary responsibilities unclear 17 Freeing up trustees time 18 It s new 8 Number of responses: 324 Improved nimbleness with fiduciary management As mentioned above, nimbleness is the third most cited advantage of a fiduciary management approach. This can be split into two aspects; speed of decision making and speed of implementation. Those with a fiduciary solution in place are significantly happier with the speed at which investment decisions are made. 81 of those with fiduciary management believe decisions are made at the right speed, while only 7 of those without a fiduciary mandate feel the same. Last year, 79 with fiduciary agreed with this statement, demonstrating a small but definite increase in satisfaction with the speed at which investment decisions are taken among those with a fiduciary mandate. Those with fiduciary management are also far less likely to feel that decisions are made too slowly: just 19 with a fiduciary solution say this, whereas more than a quarter (28) of those without a fiduciary mandate believe that their investment decisions take too long to make. Speedy decision making by experts within the confines and objectives set and agreed by the trustees and the sponsor. Survey respondent quote Aon Hewitt 13

14 Speed of decision-making With fiduciary Without fiduciary Key finding 81 of schemes with fiduciary management are happy with their speed of investment decision-making At the right speed Number of respondents: 162 Too quickly Too slowly The increasing complexity of the investment options available is a key factor in the speed of decision making. When asked what prevents them making decisions as quickly as they would like, of respondents cite this. In tandem, the range of options available to investors has seen a large increase since the previous survey, cited by 14 this year compared to 9 in 14. This links in with the drivers of growth discussed on page 9. Quicker to make and implement decisions. Survey respondent quote Reasons for slow decision making Complexity of investments Frequency of trustee meetings Range of options available Trustee time Trustee knowledge Sponsor approval Market volatility Funding concerns Other Number of respondents: 118 Other reasons given the frequency of trustee meetings (at 19 the second highest reason chosen in 15, and the most-cited answer in 14) and trustee time (14) and knowledge (13) also relate closely to the high degree of investment complexity and choice: with limited time and expertise, trustees and scheme sponsors appear to struggle increasingly with the challenges of assessing the numerous options available to them and making decisions appropriate to their scheme. 14 Fiduciary Management Survey

15 An opportunity for the investment function to be delegated to professionals to allow more complex investment solutions and quicker actions to be taken. Survey respondent quote Key finding Schemes with fiduciary management typically have greater diversification, investing in more asset classes than those without fiduciary. Fiduciary management enables greater investment diversity Investment diversity and agility have long been cited as key benefits of fiduciary management by those who have implemented a fiduciary approach and this is supported by the survey findings. Those schemes without a fiduciary solution are most likely to invest in four or five asset classes. Those with a fiduciary solution in place are most likely to have six or more asset classes in their portfolio (with nine being the next most common response). Perceived disadvantages Responses around the disadvantages of fiduciary management followed a very similar pattern to those seen in 14. As in 14, they also show some clear differences between the experiences of those with fiduciary and the perceptions of those without. Cost is the largest perceived disadvantage among those who have not implemented a fiduciary approach, cited by 78, but only mentioned by 58 of those with fiduciary. Similarly, conflict of interest is seen as a disadvantage by 5 of those who do not have fiduciary, but is only cited as a negative by 28 of those who actually have a fiduciary mandate. Governance is an expected disadvantage cited by 48 without fiduciary, but only viewed as an issue by 16 of those with a fiduciary solution. The largest disadvantage seen by those with fiduciary is the difficulty in comparing fiduciary providers. Aon Hewitt 15

16 Aon Hewitt perspective Yet again it is expertise that is highlighted as the key advantage of fiduciary management. This has been consistently top of the list of advantages for the past few years and reflects that trustees are recognising the benefit of access to investment expertise that this approach offers. Increasing investment complexity and an ever-expanding range of investment solutions, tools and asset classes, mean that expertise is effectively a prerequisite for investment success. Utilising the expertise that a fiduciary provider can offer will allow the trustees to use the full spectrum of return-seeking and liability matching solutions in order to achieve the results that they need. Importantly, by appointing a fiduciary manager, trustees are ensuring that their investment strategy is not only appropriate now but also evolves as new opportunities arise, thereby futureproofing their scheme. Daily attention to risk and investments remains second and links to the expertise offered by a fiduciary provider. Nimbleness moved up to third place this year; this covers both speed of decision making and speed of implementation. By looking at the portfolio on a daily basis, compared to trustees who may only look at it on a quarterly basis, the fiduciary provider can react quickly to any changes and capture opportunities as they occur. This means trustees avoid the delays in the decisionmaking process and hence missed opportunities that occur without a fiduciary provider in place. Trustees are seeing the benefits of having dedicated investment professionals monitoring the portfolio on a daily basis, taking decisions speedily, then implementing quickly and efficiently. Our survey also shows that appointing a fiduciary provider offers the benefits of greater diversification. As a result, this is a key driver of the growth in this area (see Section 2 also) schemes with fiduciary management are more likely to hold a greater number of asset classes than those without. At Aon Hewitt, our full fiduciary solutions typically give our clients access to -4 different investments, diversified across or more asset types, and further diversified by strategy type within asset classes. All of our fiduciary solutions are unique, designed specifically to meet each client s needs and taking into account their investment views or preferences. As seen last year, the main concern raised around fiduciary management was cost. This is something that we often hear asked; is it more expensive or does it offer value add relative to the cost? Whether fiduciary management is more or less expensive very much depends on your starting point (ie, what investment portfolio and services you currently have) and where you are looking to get to (ie, what your aim is and what you want to get from your fiduciary solution). In practice, there are some instances where it could be more expensive, and this could be due to the investment portfolio in place rather than fiduciary management being expensive, and others when it is actually a lower-cost approach. Incidentally, it is noteworthy that those with a fiduciary solution in place have a lower emphasis on cost. As fiduciary management is a bespoke solution, it is not surprising that second on the list is difficulty in comparing fiduciary providers. This is in terms of comparing both solutions and costs (as the cost is an outcome of the solution put in place). Just as no two pension schemes are the same, no two fiduciary solutions are the same. Not only do they vary between providers but also within providers depending on the schemes unique needs, and the range of solutions the fiduciary provider can offer. This makes comparing fees challenging as the solutions and elements incorporated within them vary significantly (depending on hedge ratios, growth/matching split, asset classes used, active versus passive management, flight planning services etc). The most important thing is to look at the added value and whether any extra services or elements will provide value net of all costs. At Aon Hewitt we have written a number of educational papers that provide the questions trustees should ask in order to really understand the solutions available and delve into the detail. That way they can make an informed decision on which provider and solution is right for their individual scheme s needs. We have also published papers around understanding the fees charged, which may also help trustees to understand any differences in price and how this may, or may not, impact the results they can expect. Finally, one last aspect worth touching on here is the concern around loss of control. This is a common misconception of fiduciary management; we believe that trustees actually have greater control under this approach. Trustees set, and are in control of, the investment strategy, objectives and risk tolerances, as well as any investment restrictions or parameters around the mandate. They then delegate the day-to-day management of the portfolio to the fiduciary provider (and their investment experts), who is responsible for designing and implementing an investment solution that meets these requirements. By using experts there is greater certainty of outcomes, better pensions stability and reduced funding level volatility, and therefore greater control. 16 Fiduciary Management Survey

17 4. Excellent results from fiduciary management The best test of whether a solution or approach is a success or not is the outcome and client feedback. Once again we asked respondents with a fiduciary mandate to rate their experience. Sponsor and trustee satisfaction with fiduciary management remains very high. The survey responses show that 98 rate the results of their overall fiduciary solution as excellent, good or satisfactory. 97 say the same about client service levels and 96 regarding the impact on their funding level. This is broadly unchanged from the findings of the 14 survey which also showed very high levels of satisfaction. Key finding 98 cite their overall fiduciary experience as excellent, good or satisfactory; vote of confidence in fiduciary management. Satisfaction with fiduciary mandates 6 5 Client service/advice Funding level/performance Overall Excellent Good Satisfactory Unsatisfactory 2 Number of responses: 179 (66 respondents). Excludes too early to tell Excellent; works very well. Survey respondent quote Aon Hewitt 17

18 Aon Hewitt perspective The aim of fiduciary management is to help pension scheme trustees and sponsors achieve their long-term goals and objectives. Therefore the real test of whether fiduciary management is a success is based around the results delivered and the views of the clients who have adopted this approach. We believe that fiduciary management is helping many UK DB pension schemes to reach their end-goals, either more quickly or efficiently or with greater certainty, and that it is helping schemes overcome many of the challenges they face. It is therefore very pleasing to see that the survey results, once again, reflect an overwhelming vote of confidence in fiduciary management. Importantly, this is not just in terms of funding level/performance but also their overall view of fiduciary management and the solution in place. This also corresponds with our own experiences; we regularly receive positive feedback from our fiduciary clients and of our full fiduciary clients have outperformed their bespoke liability benchmarks over the past three years (as at 3 June 15 latest available at time of printing). 18 Fiduciary Management Survey

19 5. Fiduciary provider selection process Criteria for selecting a provider When asked what the most important quality indicators are when selecting a fiduciary provider, respondents once again cite a proven track record as the leading indicator. This has been consistently top for the past few years, although other responses have seen some changes. Key finding Track record and performance remain the key quality indicator when selecting a fiduciary provider. 16 of respondents cite performance/track record as a key quality indicator while a clear investment process is the second most-cited at 15. This has risen from fourth place with 12 in 14. The manager s understanding of scheme liabilities is third, with 14 citing this; this has also increased from 12 last year. Investment experience and a decicated fiduciary team make up the remainder of the top five answers (and were second and third respectively in 14). Quality indicators Proven track record/performance Clear investment process Understanding scheme liabilities Investment experience Dedicated fiduciary team Access to specialists for each investment type Fees Management of any conflicts of interest References from other clients Other Number of responses: 372 The results vary slightly between schemes of different sizes. Large schemes are more likely to put weight on a clear investment process, with of schemes with 1bn or more in assets citing this as a key factor, compared with only 14 of small and mid-sized schemes. A proven track record is more likely to be a major factor for smaller and mid-sized schemes than it is for large schemes; it is also more important to those without fiduciary management than it is for those who already have a fiduciary provider. Aon Hewitt 19

20 Considering performance vs unique objectives As we have just seen, performance is the most important quality indicator when selecting a provider, and we now turn briefly to respondents preferences regarding the way they would measure the success or failure in performance terms of their provider. As in 14, the majority (69) do, or would, measure performance relative to their scheme s specific investment objectives, rather than versus an industry-wide benchmark. Key finding 69 of schemes prefer to measure success or failure of a fiduciary provider by comparing performance against their unique investment objectives. Large schemes have the greatest preference to measure performance of their solution relative to their bespoke investment objectives: 79 of large schemes do or would do this, compared to 67 of mid-sized schemes and 65 of small ones. Puts the critical business of investment management in the hands of professionals, not well intentioned amateurs, without (important point) giving up accountability. Survey respondent quote How do you/would you measure the success or failure in performance of your fiduciary provider? Performance relative to unique investment objectives Performance relative to industry benchmark Other Number of respondents: 86 Fiduciary Management Survey

21 Fiduciary provider preferences We asked respondents about their preferred fiduciary provider type. The majority of schemes (33) would choose their existing investment consultant s fiduciary arm as their provider. A fiduciary arm of their existing actuary s organisation would be the choice of 25, with 23 appointing the fiduciary arm of one of their existing investment managers. A different third party would be the preference of 19. This very closely follows the findings of the 14 survey. Key finding 58 of respondents cited a preference to use a fiduciary provider linked to their existing actuary or investment consultant. Who did/would you appoint as fiduciary provider? Fiduciary arm of existing investment consultant s organisation Fiduciary arm of your existing actuary s organisation Fiduciary arm of an existing investment manager Other third party provider Number of respondents: 88 Aon Hewitt 21

22 Aon Hewitt perspective A proven track record (performance) is once again the leading quality indicator when it comes to selecting a fiduciary provider. A clear investment process and understanding of schemes liabilities came in second and third respectively this year, a slight change in order from previous years. Fees remain low down the list in eighth position, reflecting that there are other more important aspects to a fiduciary provider that come above this during the selection process. of Aon Hewitt s full fiduciary clients outperformed their bespoke liability benchmarks in the three years to 3 June 15, reflecting our strong performance track record. Our longeststanding fiduciary client, who has been with us since Q1, has seen strong returns above their bespoke liability benchmark, with an improving funding level, and better risk-adjusted returns versus a typical UK pension scheme (as measured by the WM Universe Average Corporate Scheme). How to measure the performance of your fiduciary solution/ provider is one of the more topical areas of fiduciary management at present. There are many calls in the industry for a fiduciary performance league table of some sort. While this may work for products, with identical investment objectives and investment parameters, we believe this is challenging to do for fiduciary solutions as they are completely bespoke. Just as no two schemes are the same, no two solutions are the same and this means that looking at only the headline performance numbers in a league table could be very misleading. 69 of our respondents state a preference to measure the success or failure of a fiduciary provider by looking at performance of their solution versus their bespoke investment objectives, rather than versus an industrywide benchmark; this is supportive of our view. When implementing a fiduciary solution we believe it is important that trustees ensure their provider constructs a benchmark which accurately reflects their precise objectives and their unique liability profile. It is important that any performance shown versus this benchmark is delved into so that the trustees understand what is behind this and, ultimately, determine whether the fiduciary provider is delivering what they promised and in the way that they said they would do it. Fiduciary management is also often seen as the implementation of the best ideas and services already provided by an investment consultant. It is therefore unsurprising to see that the fiduciary business of an existing investment consultant or actuary (as advisers) are the top two preferences for a fiduciary provider. This also links in with the rising importance of understanding of liabilities when selecting a fiduciary provider something that is much more associated with consultancy firms. 22 Fiduciary Management Survey

23 Selection process Key finding 74 prefer a face-to-face approach to selecting their fiduciary provider. The appointment process for fiduciary managers is unchanged from the 14 findings. Schemes continue to use a combination of different methods to select a provider. 74 of respondents would use face-to-face interactions to select their fiduciary provider (beauty parades and/or site visits). 65 use, or would use, beauty parades to appoint a manager; due diligence would be used by 64 and advice from an existing provider by 54. What, if any, process did you or would you use to select a fiduciary provider? Beauty parade Due diligence Advice from existing adviser RFP (Request for Proposal) Advice from third party evaluator Site visit Advice from another adviser Other Number of responses: 38 (114 respondents) We separately asked respondents if they would (or did) use a third-party evaluator (TPE) to select a fiduciary provider (which differs to the advice from option in the question above). Only just over a quarter of those surveyed would definitely use a TPE to help them select a fiduciary provider. The remainder were either undecided or had decided definitely not to use a TPE. This supports the finding above regarding the importance of face-to-face contact with potential fiduciary providers. Those trustees considering a fiduciary mandate seem keen to take a hands-on approach to selection, gaining advice when needed, but running the process themselves. Trusting the experts and concentrating on the big picture. Survey respondent quote Aon Hewitt 23

24 In-house or external investments? Key finding 7 of respondents would prefer a performance element to their fees. Respondents were asked what investment approach they would like their fiduciary provider to take. 7 stated a preference for the use of external funds or a combination of in-house and external funds. Only 1 had a preference for in-house funds alone. Respondents were also asked about conflicts of interest in investment approaches. Two-thirds (69) of those surveyed felt that there were potential conflicts, of which investing in in-house funds was seen as the greatest potential conflict of interest, mentioned by 75. Paying for fiduciary management Respondents were asked about their preferred charging basis for fiduciary management. 43 overall state a preference for a combination of basis point and performance fees: among those with fiduciary management, this rises to of those with fiduciary management have a base fee only or combination of base and performance fees. What is your preferred charging basis? Combination of basis point and performance fees Performance fees Percentage of assets (basis point fee) Fixed fee linked to inflation Number of respondents: 81 When asked how important underlying manager fees are if/when considering fiduciary management, nearly half of respondents (43) state that performance net of all manager fees is most important. This is particularly the case for small schemes, where 49 rate performance net of all manager fees as the key focus. Nearly a fifth of large schemes (19) are prepared to pay higher underlying manager fees to ensure investment in the asset classes they want. Passing over the day-to-day investment decisions to a company that aims to reach your strategic goals, within the trustees boundaries. Survey respondent quote 24 Fiduciary Management Survey

25 How important are underlying manager fees if/when considering fiduciary management? 5 43 Key finding 32 schemes said the trustees monitor their provider s performance. Only 11 would make use of a TPE for this Performance net of all fees is most important for us Number of respondents: 183 Performance and fees are considered equally We would prefer to use some passive management to reduce underlying manager fees We are prepared to pay higher fees to ensure investment in the asset classes we want Other / none of these We are willing to accept potentially higher volatility on returns to reduce underlying manager fees Monitoring fiduciary management We asked respondents how they monitor the performance of their provider. Responsibilty for this falls to schemes actuaries or investment consultants in 42 of cases. 32 of respondents said their trustees monitor their fiduciary provider s performance. Only 11 would make use of an independent third party evaluator for this. How do you monitor the performance of your fiduciary provider? Trustees monitor Using your actuary Through your investment consultant Through the use of an independent third party evaluator Sponsor monitors Other Number of respondents: 169 Aon Hewitt 25

26 Aon Hewitt perspective The rapid growth of the UK fiduciary market continues to attract a lot of attention. One of the misconceptions around fiduciary management is that far too few mandates are being won on a competitive basis, and that clients are being flipped by their investment manager or investment consultant into a fiduciary solution. However, both the results of this survey and our own experiences suggest otherwise. Our survey shows that 65 would/did undertake a beauty parade and that this would be used in combination with at least one other form of selection process. Half of the respondents would, or did, use an RFP, which again reflects a competitive form of tender process. Trustees are clearly using a number of processes to ensure that they select both the provider and the solution that is right for them, and it is great to see that the vast majority would use face-to-face interaction to help achieve the right result. We are strong advocates of site visits before any decision is made; this gives the trustees a great opportunity to really understand the solution, the systems and risk management, to meet the people who will actually be responsible for their portfolio (and not just the sales team), and to get a feel for what it would be like working with the provider. Given that fiduciary management is a trusted and long term partnership, this is key. At Aon Hewitt, over 85 of our fiduciary business wins over the past 3 months have been through a full competitive tender process. In terms of investment approaches, the majority of respondents prefer the use of external, best-in-class funds only or a combination of in-house and external funds. Consistent with last year, respondents deem investing in in-house funds as having the greatest potential conflict of interest. We believe this is an area that fiduciary providers need to be open and honest about. The potential conflicts around setting and implementing the investment strategy, and how underlying managers or investments are selected, can vary between providers so it is important to understand if there are any conflicts and, if so, how these are managed or minimised. As discussed in Section 3, cost, or fees, is one of the main concerns around fiduciary management. There is often a difference in view between trustees and sponsors around cost and the emphasis placed on this. For example, one party may want fees as low as possible and can be very focused on the absolute numbers, whereas another party may be willing to pay a bit more in order to get an even better outcome and be focused on the end result. As this is an area we have frequently seen debated, for the first time we asked respondents how important underlying manager fees are if/when considering fiduciary management. It was interesting to see that nearly half said that performance net of all manager fees was the key focus and that a fifth of large schemes were prepared to pay more to ensure they get the investments they want. This is supportive of our view that it is net of fees performance or added value that is most important, and not just at a manager level but the overall cost of the solution. Our experience is that once schemes are comfortable with the solution and understand how the fees are derived, the benefits and added value of a fiduciary solution (net of all fees) mean this is a really attractive option. The four component parts of the fee that are extremely important to understand and to be comfortable with are; the fiduciary provider fee, underlying manager fees, investment consultancy and other fees (such as administration and custody). All of these will vary depending on the provider and the solution in place. Not only are trustees taking the lead when selecting a fiduciary provider, they are also taking the lead when it comes to monitoring their provider s performance. This could be because they feel more in control of their strategy, having delegated the day-to-day decisions to a trusted partner that they spent time selecting. The holistic reporting at the overall scheme level, versus their liability benchmark, also means that trustees can more clearly see the provider s performance and progress toward meeting their end-goal, without the need for reviewing multiple manager reports with performance versus standard indices. The transparency of performance and reporting means trustees can focus on the key strategic decisions and overall performance at their quarterly meetings and less on the day-to-day activities. The use of TPEs within fiduciary management is still relatively new and is yet to be fully proven in terms of the value they add (ie does it help generate better outcomes?). We are starting to see them being part of some selection processes and, to a much lesser extent, ongoing monitoring and this is reflected in this survey. The use of TPEs within the fiduciary market will clearly evolve over time and it is unclear how exactly and what form/presence it will take in the future. Many are battling themselves with conflicts of interest which may prove a barrier for appointment. As with fiduciary managers, what is certain though, is that TPEs will need to prove added value and demonstrate transparency and management of conflicts. 26 Fiduciary Management Survey

27 6. What are DB pension schemes really concerned about? For the first time, in this year s survey we asked respondents what were their two main concerns with regards to their DB pension scheme. This was a free text box answer to encourage honest and open views. These responses have been grouped together in the word cloud below. This shows pictorially the most common concerns which included deficits, investments, sponsor strength, liabilities, interest rates and yields. Respondents talked about volatility from a few perspectives; in terms of risk, asset value and general market volatility. The effect of yields and interest rates on liabilities were commonly mentioned, as well as how to better match assets for liabilities. Investment portfolios and the asset classes in which to invest were also on the list. Unsurprisingly, these concerns and challenges directly link to the drivers of growth within fiduciary management (see Section 2, page 9) and the key factors in deciding to appoint a fiduciary provider (see page 11). Aon Hewitt 27

28 7. About the survey and respondents As in previous years, the survey took the form of an online questionnaire, sent to a broad crosssection of trustees, pension managers and other pension scheme representatives. For more on the respondents, see below. We have analysed the results by a number of factors, including size of assets, flight plan use and fiduciary status (whether trustees have appointed a fiduciary provider wholly, partially or not at all). Some of these category findings are inevitably based on small numbers. Some percentages do not add up to due to rounding. Some questions invited multiple responses. As well as findings and analysis, we have again provided expert commentary and insights under the heading of Aon Hewitt perspectives. Aon Hewitt is grateful to those who gave their time and views so generously. We continue to value their input. Roles of respondents As in previous years surveys, the majority of respondents work in the pensions arena, with 18 being pensions directors or managers. Many also hold trustee roles, with 34 holding either member-nominated (25) or sponsor-appointed (9) trustee positions. 11 are chairs of trustee boards, with a further 9 acting as secretary to the trustees. 7 are independent trustees. 6 are finance directors or managers. Roles of respondents Sponsor-appointed trustee 9 Other 11 Finance director/manager 6 HR director/manager 3 Pensions director/manager 18 Member-nominated trustee 25 Secretary to trustees 9 Chair of trustees 11 Number of responses: 265 Independent trustees 7 28 Fiduciary Management Survey

29 Size of scheme By asset size, the responses to the 15 survey show a strong correlation with previous years results. The majority of schemes responding () have between 1m and 35m in assets. 16 have assets of over 2.5bn and 18 have less than 5m. Size of scheme 1bn 2.5bn 8 More than 2.5bn 16 m 8 21m 5m 51m m 14 51m 1bn m 5m 1m 35m Number of respondents: 2 Aon Hewitt 29

30 3 Fiduciary Management Survey

31 Contact Sion Cole Partner and Head of European Distribution Delegated Consulting Services +44 () Follow me on Working in partnership with our clients At Aon Hewitt we believe in working closely with our clients from the very outset to understand the challenges they face and their individual needs. Working in partnership with the trustees and sponsor, we create a bespoke solution to help address these issues and help them to meet their long term goals. No two clients of ours are the same and each have their own bespoke liability benchmarks, reflecting our truly tailored delegated offering. To talk to us about any of the points we have raised in this Survey or to find out more information about our delegated offering, please do not hesitate to contact your Aon Hewitt Consultant or Sion Cole on +44 () or at sion.cole.2@aonhewitt.com. aonhewitt.com/delegatedconsulting About Delegated Consulting Services Aon Hewitt s fiduciary offering (Delegated Consulting Services) is focused on helping trustees and sponsors achieve better security for their scheme members. We do this through helping you meet your unique long term objectives and, importantly, through improving your scheme s funding level. What makes us different? Only we ask the best questions and then really listen to exactly what our clients tell us. By working in partnership in this way we can then create a truly bespoke solution that is designed to meet your unique requirements. We don t just say bespoke, we live by it. Aon Hewitt currently holds fiduciary manager of the year awards from three of the industry s leading publications; Professional Pensions (15), Pensions Age (15) and the FT (14). Our ability to create truly bespoke solutions has been cited as part of these award wins and is one of the reasons why our clients vary significantly in size and how we work with them. Examples of some of the solutions we can offer clients include full fiduciary with bespoke growth and liability matching portfolios and daily monitoring of triggers. We also offer single solutions (partial fiduciary mandates) such as hedge funds, alternatives mandates and flight planning with dynamic de-risking programme. About Aon Hewitt Aon Hewitt empowers organisations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organisational and personal performance and growth, navigate risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is a global leader in human resource solutions, with over 3, professionals in 9 countries serving more than, clients worldwide. For more information on Aon Hewitt, please visit: aonhewitt.com Follow Aon on Twitter: twitter.com/aon_plc Sign up for News Alerts: