Impact of the CMA Review
Why trustees have a great opportunity to use their fiduciary tender to add value
30 Sep 2019
The CMA found that almost two thirds of pension schemes had not run a competitive tender when appointing their fiduciary manager and that there was a strong tendency for trustees to appoint the fiduciary management arm of their existing investment consultant. Aimed at driving competition, one of the key requirements in the CMA’s final order is that all fiduciary mandates covering more than 20% of a scheme’s assets must be competitively tendered. For new appointments, this must be completed before the appointment, and for existing mandates which were not competitively tendered, this must happen within 5 years of the appointment (or by 10 June 2021 if this is later).
We are now seeing an increasing number of trustees approaching us as an independent consultant for help and who are making progress along the tendering path. From what we’re seeing, it’s very clear that irrespective of the reasons for tendering, and even where they are very happy with the current service from their fiduciary manager, trustees have a great opportunity to use a tender to add real value.
We’ve seen a number of benefits from this exercise, for example:
- Reviewing your objectives: if your mandate was put in place more than a couple of years ago and your fiduciary manager has been doing a good job, you should be a lot nearer to your end game and testing whether you need to be targeting such a high rate of growth. Do you want as much active management in those asset classes? Is a performance incentive still appropriate?
- Generating new ideas: a tender exercise can be great for generating new ideas. You’ll get new perspectives from competing fiduciaries. Whether or not you stick with your current manager you now have a wealth of opportunities to explore.
- Getting value for money: by inviting quotes from competitors, your fiduciary manager will be properly incentivised to sharpen their pencils and offer you better fees. This in itself can save many multiples of the cost of the tender each year.
So, what makes a good tender?
We think that there are a few key ingredients:
- Don’t rush: build in enough time at the start of the tender to establish what you value in a fiduciary manager. What do you want from fiduciary management? Is it implementation, manager selection or lower cost? If you already have a fiduciary manager then are your priorities the same now as when you put them in place? Don’t rush also means don’t leave tendering to the last minute when you’ll be up against a statutory deadline.
- Follow a robust process: for some trustees, particularly those who’ve had regular access to independent oversight and have a better understanding of the market, a ‘desktop’ exercise might be all that’s required. For others, we think that there’s significant value in meeting competing fiduciaries to understand their offerings and get a feel for what they’re like to work with. This will also help draw out the best from your incumbent.
- Use the process to drive constructive change: even if the outcome is that you stay with your current manager, you can use what you’ve learned to make things work even better going forwards. Did you realise that you really like the jargon free way that your fiduciary explains things to you? Make sure you tell them and they will make it a focus. Did you like the suggestion from one of the competing firms for a single page quarterly reporting dashboard? Tell your current manager and see what they can do.
At the end of the day, the tendering process is a mandatory requirement of the fiduciary regime we’re now in. However, just because its mandatory doesn’t mean it should be treated solely as a compliance exercise. We suggest that you take the opportunity to get as much out of it as you can. By thinking about the tender like this it might even make its way a couple of notches up that overflowing to-do list of yours.