Archive for December 2018

Alan Collins

The long-awaited Competition & Markets Authority (CMA) investigation into investment consultancy and fiduciary management has been completed and its final decision has been published.

All in all, to me, the CMA seems to have reached a pretty balanced assessment of the market and put forward some helpful remedies to the perceived problems. It is not the “all out attack” on the big three (and soon to be bigger in the case of Mercer) that some were hoping for (but, was never going to happen). Nor is it a full endorsement of all current practises and so some things will change.

The investigation focussed on two areas – investment consultancy and fiduciary management. To be clear, we provide both of these services to a number of trustee boards of defined benefit pension schemes.

The main findings of the investigation are that there is a low level of engagement by some pension trustees in choosing and monitoring their provider. The CMA also found that firms (like us) which provide both investment consultancy and fiduciary management have an “incumbency advantage” when fiduciary appointments are made.
The CMA also found that there may be high costs of switching providers and that many trustees find it difficult to access and assess information in relation to the fees of their existing fiduciary manager. My own experience is that the cost of switching investment consultant is often much lower than the costs of switching other services in our market (such as pension administration). Switching fiduciary manager may well be expensive due the potential costs associated with buying/selling investments, so the costs for these need to be understood as far as possible, before any switch is made.
I have also found the investment services market one of the more fluid areas of our industry, and one which is relatively easily accessible by new providers. I am further confident that all of our trustee clients have complete visibility and transparency of the fees paid and the services we provide.

So, what is the CMA going to do?

Following its investigation, the CMA is proposing to:

  • Require competitive tenders for first-time fiduciary appointments (or within five years, if the appointment was made without a competitive tender being undertaken);
  • Require investment consultants to separate marketing of their fiduciary management and to inform customers of the above tendering requirements;
  • Require fiduciary managers to provide better and comparable information on fees and performance;
  • Require trustees to set objectives for their investment consultant; and
  • Require investment consultants and fiduciary managers to report on performance using basic minimum standards.

All of the above seem to be reasonable requirements of trustees and consultants/managers. Indeed many schemes will already meet many or all of these requirements. My main concern is around the belief that “performance information” can be comparable. As stated in our response to the consultation, given the bespoke nature of pension schemes and the strategies put in place, applying a standard will prove difficult.

The report asserts that there is substantial confidence that a common standard could be implemented, but we still believe that it will be very challenging to agree a transparent approach to measuring performance on a standard basis. There is a real danger that a common standard will fail to identify genuine outperformance (or underperformance) and that it will actually drive inappropriate behaviour, as some providers might be tempted to adjust their strategies artificially. We will, of course, work within the parameters that emerge while sticking to our principles to achieve the best outcomes for clients, and we will be very interested to see how a genuine “apples vs apples” comparison standard can be put in place.

Angela Burns

At the time of writing, on 29 March 2019 the UK will exit the European Union with or without a deal.

It is not possible to guess what will happen in the coming months and how markets will react. For Trustees with defined benefit pension schemes it’s an uncertain time.

The risks that Brexit poses are not new – they are the same risks that pension schemes face every day. Brexit just provides an increased chance of unlikely events.

So how should Trustees prepare?

In December 2015 the Pensions Regulator introduced guidance for Integrated Risk Management confirming that Trustees should consider risk at a holistic level. The three main areas of risk are ‘Funding’, ‘Covenant’ and ‘Investment’. Trustees should consider the main risks faced by the scheme across all three areas and more importantly how they interact. Trustees should also have in place contingency plans setting out actions that will be undertaken to limit the impact of risks should they materialise.

Brexit is effectively a ‘test’ of how well Trustees have implemented the Pensions Regulator’s proposals. A Trustee board with a robust IRM framework will be well placed to deal proactively with risks as they emerge.

It is important during times of volatility that Trustees have access to timely and accurate information to make quick, informed decisions. Trustees should ensure that their advisors are well placed to provide regular information in the lead up to, and after the 29 March 2019. Any delays in information provision will add to risk exposure.

Trustees should also have access to scenario analysis tools to determine the impact of certain events – for example a 1% p.a. fall in gilt yields. This will allow the Trustees to specify more robust and accurate actions when considering contingency plans.

Trustees with valuation dates on or around 29 March 2019 should consider the potential impact of this and may decide that the valuation date should be moved. In my view, there is sufficient flexibility in the funding regime to take a long term view on funding, and taking a snap shot of the funding position at a single point in time should not drive funding decisions.

In times of volatility, Trustees should monitor transfer value requests and any other member events where actuarial factors are used. If, for example, extremely low gilt yields result in high transfer values, the Trustees may choose to delay the provision of transfer values to see if the low gilt yield environment persists.

Trustees should also consider any employer exercises offering member options and when these options may be exercised.

Trustees may wish to disinvest funds in advance to allow for any ‘known’ payments on or around March to avoid disinvesting in inopportune conditions.

From an actuarial perspective planning is key, and a good IRM framework should result in quicker decision making.

Mike Crowe

I am sure that with the many aspects of Brexit that are occupying the minds of businesses around the country the impact on the company pension scheme might not be high up on the list for the sponsoring employer. Whilst I have every sympathy for this view it would be remiss of me not to suggest that companies don’t lose sight of this and to engage with their trustees for whom this is a very real issue.

Let me start with a question. If you asked your trustees what was the top risk on their scheme risk register what would they say? If it is not “Brexit” then ask them again until they get the right answer. (Yes, I gave you a hint there.) The current economic uncertainty caused by Brexit highlights the need for an effective integrated risk management framework for pension schemes. It is important that your trustees understand the risks that the scheme faces and that they are actively engaging with you. Effective contingency planning is key and that planning is needed now.

But, as the events of November 2018 have shown, no one knows what 29 March 2019 will bring or indeed who will be leading the discussions, so how can I plan? Will there be a deal? If there is a deal what will it look like – a hard Brexit, a soft Brexit or something in between? Maybe no Brexit at all? Will the date or the transition period be extended? All valid points, but, as I was always told, you hope for the best but prepare for the worst. So with that in mind what do you need to discuss with the trustees?

Employer Covenant

The impact that Brexit will have on the business of a sponsoring employer is critically important to the trustees. Conversations should be taking place so that trustees and their covenant advisers can understand the impact on the sponsoring employers business prospects given the uncertain economic climate and potential shifts in currency or other markets  which may impact on their support for schemes – either in terms of DB funding or contributions to DC pots. This is something that you will be very aware of for your business and open and honest dialogue with your trustees will allow them to effectively assess risk and plan.

Actuarial Assumptions

The impact of Brexit should be taken into account in setting assumptions for actuarial valuations and agreeing recovery plans. To enable the trustees to assess the impact on planned contributions to the scheme, they need to understand the impact of Brexit negotiation outcomes on the cashflows of the business.

The funding levels of DB schemes need to be reviewed as continuing low interest rates and quantitative easing means DB liabilities remain high. New market conditions will raise questions about whether the scheme’s valuation is still current. The funding level and the associated risk it poses to the employer needs to be considered and ways of mitigating this risk need to be discussed.

Buy out prices for DB schemes may be more attractive and trustees may be checking with the scheme’s advisers whether now is the time to remove some risk from the scheme.

For a sponsoring employer this is all relevant and relevant now. Being an active part of the process is crucial not just for the scheme but for your business too.

Investments

Trustees will need to consider whether the scheme’s investment strategy is still appropriate for current market conditions and take advice from their investment advisers. For a DC scheme, they will need to check to see if the default fund is suitably diversified so as to protect members from any shock to the UK or European economy. A check should be carried out to see whether there has been an impact on the value of collateral that the scheme posts or receives under derivative contracts. The scheme might need to post extra margin, or ask their counterparties to do so.

It will be some time before there is clarity on how Brexit affects schemes’ investments, contingent assets and investment yields in other countries – both EU and non EU. Trustees need to keep this under review.

Trustees will also need to check that their fund managers have a Brexit plan. They should.

Scheme members may well be worried about security of their pensions in the run up to 29 March 2019 and beyond.  It is imperative that you and the trustees prepare for whatever 29 March 2019 brings. As far as you can, protect the scheme and the members from the impact of Brexit. Communication will be key both with your trustees and your employees to manage the uncertainty that Brexit

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