Fiduciary Management A guide for pension schemes KPMG Investment Advisory 2017
Is Fiduciary Management right for me? Can Fiduciary Management improve my pension scheme? This is a question we often hear from trustees. To answer it we need to be clear first about what your scheme needs, and then about what Fiduciary Management does. Fiduciary Management is a way of overcoming obstacles that some trustee boards face and implementing an agreed investment strategy. Removing these obstacles can lead to better investment performance. The first stage is identifying the obstacles. We have put together a list of questions that trustees can ask themselves to home- in on any problem areas: 1 2 3 4 5 6 If you had more time, would your portfolio look different? Has recent investment performance been below expectations? Does your investment strategy feel too simplistic? Do you feel like you are missing out on new investment ideas? Do you feel you lack control of your scheme s investments? Do you feel uncomfortable with the investment decisions you are being asked to make? If you answered yes to any of these questions, this can indicate that your investment decision making structure is not working as well as it could do. Fiduciary Management might be the right approach. For example you might want to invest in hedge funds but don t have the meeting time to keep track of them on an ongoing basis. Or you might want the portfolio to invest more opportunistically in different asset classes but don t have the expertise to quickly authorise an opportunistic investment. Your investment strategy remains your most important decision. Issues such as deciding what target you are aiming for and how much return and risk you want to pursue cannot be delegated. When you have established the direction of your investment strategy, Fiduciary Management could be used to help you implement this strategy. The services provided to you by your Fiduciary Manager should match the strategy that you have decided to implement. It is important to remember that Fiduciary Management is not a panacea it does not in itself guarantee better investment returns. It is also possible that a relatively simple change may address your problems. For example the creation of an investment sub - committee with more time to devote to investment matters. Therefore each scheme will have to weigh up the costs of Fiduciary Management with the specific benefits it can bring to them before deciding if it is the right option. Will using a Fiduciary Manager give me better investment returns? Investing your pension scheme money is a bit like travelling up a motorway: you can choose a slower safer lane, or a faster more dangerous lane. A core function of a Fiduciary Manager is to help you navigate the motorway sensibly. However they will still follow your guidance (slow and steady or fast and furious) and will still be subject to traffic jams or bad weather. So while good performance is always an aim in choosing a Fiduciary Manager it cannot be guaranteed. As important as your Fiduciary Manager being a good driver is that you have given them clear instructions on the destination and preferred route before they receive the keys.
How to choose a Fiduciary Manager? If you ask a room full of people whether they consider themselves to be a better than average driver more than half of them will say yes. If you ask a room full of Fiduciary Managers whether they believe that they are a better than average Fiduciary Manager you will get a unanimous response! However there are good reasons why, counter -intuitively, the drivers and the Fiduciary Managers can in theory all be correct. This is because it all depends on what criteria you are using to define being good. One driver might think they are better than average because they drive cautiously and have never had an accident, whereas another driver might be more skilled at reverse parking. They are both better than average because they are using very different criteria to assess themselves. Different Fiduciary Managers will also have different strengths and weakness. Some might have large departments dedicated to identifying the best performing fund managers. Others will be more focussed delivering a more conservative strategy with emphasis on managing big picture risks and costs. To identify the right Fiduciary Manager for your scheme you need to identify the jobs that you want them to do for you. Then a suitable Fiduciary Manager can be matched to the role. Ultimately you are trying to find the Fiduciary Manager who is best placed to generate good returns for your pension scheme. But the how is just as important because you need to be comfortable with the (inevitable) investment risks that the Fiduciary Manager is taking on your behalf. So trying to find the best Fiduciary Manager is like trying to find the best driver, before you can start searching you have to decide precisely what role you want them to perform and what qualities you are looking for. i Case study: Selecting a manager After deciding that Fiduciary Management was right for them, a client asked KPMG to help them choose a Fiduciary Manager for their pension scheme. We held an initial interactive workshop meeting with the scheme to find out exactly what were the priorities and concerns of the trustees. It was clear that the main pull factor was the ability to put in place a more complex investment strategy. A key concern was costs: they had to see clear value for money in the service. They were less concerned about short term volatility given the strength of the sponsor. Having established the criteria we used a focused set of scheme specific questions and our existing research into Fiduciary Managers in the UK, to help the trustees identify the most suitable Managers. These Managers were briefed on the circumstances of the scheme and asked to provide an indicative asset allocation. Three Managers then met the trustees who also had the opportunity to establish which manager was the best fit with them and the way they worked. There was a final fee negotiation before the successful Manager was chosen. Working with KPMG the trustees were able to feel a high degree of confidence that they had chosen the right Manager for the job, at a reasonable cost.
Keeping your Fiduciary Manager on track If you make sure that you are fully engaged with your Fiduciary Manager throughout the journey to full funding, you are much less likely to be surprised where you end up - and how much it has cost you. What does staying engaged mean? It means knowing exactly what investment decisions have been delegated to the Fiduciary Manager and what investment decisions remain with the trustees. It means knowing what have been the key factors driving performance so far and whether this reflects good Fiduciary Manager decisions, good trustee decisions, or the behaviour of the markets. It means knowing exactly what you are paying your Fiduciary Manager and what the fund and transition costs have been in your portfolio. It means having a realistic expectation of what your Fiduciary Manager can achieve and how. For many trustees without specialist investment knowledge, properly keeping track of their Fiduciary Manager can be time consuming and very difficult to identify strengths and weaknesses. This is where we recommend employing a third party to oversee your Fiduciary Manager. An overseer can ensure the significant cost of Fiduciary Management offers value for money, save the trustees valuable time, and ensure that investment performance remains on track and is understood. Here at KPMG Investment Advisory we look at three key aspects when monitoring a Fiduciary Management mandate: 1 2 3 Have the actions the Manager has taken been reasonable and proportionate? Has the performance and risk in the pension scheme been satisfactory and does the long term investment objective remain feasible? Have there been any changes at the Fiduciary Manager which may compromise their ability to deliver good performance in the future? This helps to ensure that any issues are identified early and long term performance is improved as a result. Our approach is collaborative, to help you get the best out of your Fiduciary Manager. Anthony Webb Fiduciary Management is a bit like taking a taxi After a taxi ride in Panama City ended acrimoniously I came to the conclusion that there is a universal rule which can be applied to improve any taxi journey: the more you engage with your taxi driver the more likely that your ride will be as you expect. If you fall half asleep or otherwise zone out, the chances of things going wrong go up noticeably. The same is true of keeping an eye on your Fiduciary Manager. If you make sure that you are fully engaged throughout the journey to full funding, you are much less likely to be surprised where you find yourself. i Case study: Identifying a problem with a Fiduciary Manager A client had been using a particular Fiduciary Manager for several years when they were approached by the Manager with a proposal: to make a small change to their performance benchmark. On the face of it this proposal seemed innocuous. However when examining the implications more closely we were able to highlight that this would have led to an immediate increase to the Fiduciary Manager s performance related fee. Our oversight role effectively saved the scheme over 100,000 they would have otherwise paid to the Fiduciary Manager.
Anthony Webb Head of Fiduciary Management Research T: +44 (0)207 311 8508 E: anthony.webb@kpmg.co.uk Simeon Willis Head of Investment Strategy T: +44 (0)207 694 4408 E: simeon.willis@kpmg.co.uk kpmg.com/uk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.