Are consultants or asset managers best placed for trustees of pensions schemes to delegate investment decisions to?
For trustees of pension schemes looking to delegate all or some investment decisions, there are many providers of Fiduciary Management (FM) solutions in the market today. Whilst each may offer something different from the next, they all fall into two broad categories:
- Asset managers
Before the advent and rise in popularity of FM services, the roles of consultants and asset managers were very clear cut:
- Consultants provided advice – working with trustees and sponsors to determine objectives, set strategy based on return and risk requirements, advice on the asset classes to use and then in turn advise on the asset managers and funds to implement the strategy
- Asset managers managed the assets; creating and operating the funds and strategies to generate returns at a given level of risk to meet their client’s objectives.
However over time, and as FM services have become more popular, the lines have become blurred, with each respective agent no longer only operating in their principal domain.
From an asset management perspective, asset managers aim to provide strategic advice as well as management services. Consultants also now manage and invest client assets via underlying investment funds.
So whilst the asset management side of the equation has become more blurred in terms of who does what, what about the liability side? This is where we see big differences between consultants and asset managers; differences which can have material consequences for those schemes using FM services.
Having a good technical and practical understanding of how pension scheme liabilities are calculated, how they change and how they are impacted by various factors, is vitally important. It is here that investment consultants, and specifically those borne out of traditional actuarial consultancies, have a technical and operational edge over asset managers.
We set out below practical experiences where the accurate consultant led assessment and monitoring of liabilities has led to better outcomes for FM clients.
Mortality changes: Updating base mortality tables can have a significant effect, e.g. moving from the 2016 to the 2017 industry standard table on average resulted in a reduction in liabilities (and improvement in funding level) of c3%. Consultants will typically incorporate this information more rapidly into monitoring, thereby benefitting clients and identifying opportunities quicker.
Actuarial factors and cash commutation: A change in actuarial factors or cash commutation experience can result in material changes impacting funding and liability hedging levels. For example, for one of our schemes, changes in the amount of cash members were taking at retirement compared to what was assumed resulted in the hedging reducing from 50% to c40%. Being proactively aware of this enabled recalibration of hedging back to the target level.
Transfer values: Large numbers of small transfer values or large individual transfers (or both) can have a material impact on funding levels. The introduction of Pensions Freedoms in 2015 has dramatically increased transfer value activity so it is important to monitor this. For example, one scheme had transfer values of £5-6m over a short period representing 10% of assets, which resulted in a material improvement in the funding level allowing the scheme to reduce risk.
Liability risk reduction exercises: Many sponsors and Trustees continue to consider liability reduction exercises, for example Pension Increase Exchange or Trivial Commutation exercises. It is important that the FM provider is aware and understands the impact of these exercises, as not only can they reduce liabilities, improving the funding position and improving the attractiveness of buy-out pricing but they also change the shape of the liabilities impacting the level of hedging protection.
Buy-out monitoring services: Third party insurer pricing can and does vary substantially and actively monitoring scheme specific pricing is now possible. JLT is able to actively monitor pricing for our clients alongside our FM solution.
So, are consultants or asset managers best placed to offer fiduciary management?
Well, it depends.
If trustees are looking for a fiduciary solution for purely investment needs, then arguably either a consultant or asset manager led FM provider could be appropriate for them.
However, if trustees want to exploit the full value providers of FM can bring, they should consider both the investment and actuarial sides of the coin and ensure both are being actively considered by their chosen provider.
For more information on fiduciary management speak to your usual JLT contact, or James Leeming, Director, firstname.lastname@example.org.