Chaotic pension performance measurement tamed

Imagine if there were a pensions outsourcing market that grew 47 per cent last year, with 92 new deals. Imagine if three-quarters of these deals were done without a competitive tender process, and there was no robust measure to ascertain managers' investment performance.

This chaotic situation exists in the UK's fiduciary management market, where 13 providers supervise 3.4 per cent of the UK's defined benefit pension assets, belonging to 5 per cent of DB schemes.

A fiduciary manager has responsibility for some or all aspects of developing, implementing and administering the scheme's investment strategy, with due regard for its liabilities.

"That is a significant amount of delegated responsibility, but there is no robust quantitative measure of performance," says Anthony Webb, head of fiduciary management advisory UK at KPMG, the professional services firm.

This lack is not due to a sinister conspiracy on the part of fiduciary managers, but rather to the difficulty of creating a standard methodology for comparing performance across a variety of mandates, each with different risk profiles and return objectives.

The opacity of the market does not help pension trustees to make decisions. Without a way to measure a manager's ability to deliver investment performance, it is impossible to make an informed choice regarding providers, or even to be sure the concept of fiduciary management can add value.

"There is some cynicism among pension fund boards as to the efficacy of fiduciary management," says Peter Dorward, managing director at IC Select, which supports pension schemes in selecting investment consultants and fiduciary managers.

In an attempt to allay this cynicism, IC Select is developing a standard methodology for reporting the investment performance of fiduciary managers. It has created a template to make it possible for them to present the figures in a standard format.

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"There is so much mistrust about what is provided in the market because there are so many unsubstantiated claims flying around," says Mr Frank.

"If we could find a proposal that satisfies the needs of current and potential clients then it would serve the market well," says Sion Cole, partner and head of client solutions at Aon Hewitt, the consultancy. "We are very much for performance transparency. That can only be a good thing. We are, however, waiting to see a proposal for a set of standards that is not in some way potentially detrimental to the industry."

Mr Cole, who was not familiar with IC Select's initiative, has concerns about the performance of fiduciary management mandates being compared directly because each is "a bespoke solution that is built around individual client needs".

To reflect this, IC Select's methodology integrates risk measures and requires performance to be measured against an appropriate benchmark, in most cases client liabilities.

The other issue the proposed standards attempt to mitigate is that of cherry-picking. "You have to have confidence that it is not just the manager giving you the figures that show them in their best light," says Mr Webb.

Under Mr Dorward's methodology, fiduciary managers would have to include all their mandates in a set of composite buckets, determined by risk profile, reward objectives and hedging restraints. Although managers would have freedom to decide which mandate went into which composite, every mandate would have to be included somewhere.

Mr Frank's proposal bears an overall similarity to Mr Dorward's, although the particulars are slightly different and more statistics will be calculated on the basis of the data provided.

The initiative has met with support from fiduciary managers for the most part. Cardano is among those already signed up to supply the relevant data to IC Select.

"We have been publishing our results for a long time and calling on others to do the same," says Richard Dowell, Cardano's head of clients. "Transparency is always good for trustees and it is something all fiduciary managers will ask for from their underlying managers, so why shouldn't they all do the same?"

This attitude is widespread in the industry, according to Mr Dorward, who says "the great response we have had is the support from fiduciary managers. They want to be as transparent as they can."

"Those who choose not to be involved are only going to bring more scrutiny on themselves," says Mr Frank. "If managers are obfuscating, you have got to ask why."

Mr Webb considers the idea of standards beneficial for the industry, as "it could make trustees more comfortable that this service could work".

Even those who are more sceptical about the advantages of fiduciary management admit the introduction of proper performance reporting standards would be positive.

Redington, the investment consultancy, announced last year it would not enter the fiduciary management market because of concerns about the conflicts of interest raised, but nevertheless welcomed the proposal for standards.

"Comparing fiduciary managers' performance is currently difficult," says Nick Lewis, vice-president of investment consulting at Redington. "IC Select's move towards increased transparency is a step in the right direction."

Emmy Labovitch, partner at Novarca, a consultancy that helps asset owners work out what different services cost them, is keen to point out that investment performance is not the only element of fiduciary management that should be considered.

Ms Labovitch says each of the services offered, including input on regulatory developments; input on assumptions about asset liability management; risk monitoring; compliance monitoring; and reporting on various aspects of the portfolio such as performance, cash flow and risk budgeting, is available from other service providers individually.

"It is about unbundling it. What we really want to look at is what is included in the fee, and clients should be asking themselves, 'What is the premium I should be paying for the convenience of dealing with just one provider?'"

Everyone contacted for this article was careful to emphasise that performance is not the only, nor possibly even the key, criterion that trustees should consider when choosing a fiduciary manager.

However, the ability to report it in an intelligible and comparable manner should be a help to trustees who decide to hold a competitive tender process for their next fiduciary manager.

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