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How pension fund trustees can go about selecting an expert, independent advisory firm or ‘Third Party Evaluator’ (TPE) when tendering for fiduciary management services.
An increasingly competitive fiduciary market
Recent estimates suggest more than £150 billion UK pension fund assets are under the control of fiduciary managers. Around half of these are expected to be compelled to re-tender their fiduciary management arrangements over the next few years under new regulations resulting from the CMA’s review into the fiduciary industry.
That is a huge amount of money which providers will be competing to manage, and this is before we even consider future fiduciary mandates which have yet to come to market.
With significant sums suddenly at stake, market dynamics are likely to change rapidly. Pension fund trustees hold the ace card with increased competition likely to lead to sharper pricing and beneficial terms.
But, not so fast! While managing your pension fund’s expenses is clearly important, when it comes to fees relating to investments, the focus should be on the value added for the fees you are paying rather than the level of fees in isolation.
Choosing a fiduciary manager
"Fiduciary management is a multi-faceted service; managers have different investment approaches and strengths in different areas. Since no single fiduciary manager is ‘best-in-class’ in all areas, the key is to select a manager whose approach fits with your specific investment needs, while ensuring you are getting a good deal at the same time."
You also need a high degree of confidence in the capabilities of your manager. Your decision about which fiduciary manager to use is one of the most financially significant decisions which a pension fund trustee can take. It’s important to get it right!
And so follows the increasing demand for the so-called TPE – an expert, independent adviser to pension funds embarking on a fiduciary management tender process.
The emergence of the Third Party Evaluator
It has been said that the number of fiduciary management TPEs operating in the UK outweighs the number of actual fiduciary managers. The accuracy of that claim in reality depends on what qualifies as a TPE – if you were to set the bar at organisations which routinely research the market of fiduciary managers and have a specialist team of advisers in this area, then the list of credible TPEs can be narrowed down quite considerably.
What can be said with more confidence, however, is that in the same way the approaches of fiduciary managers vary, so too do the approaches of TPEs.
This is a consequence of the wide-ranging backgrounds of the different firms which operate in this area, from investment consultancies like Barnett Waddingham, to audit firms, provider selection firms and some professional trustee firms.
How then should pension fund trustees decide which firm to use?
One option could be the Pensions Regulator’s (TPR) guidance on ‘Tendering for Fiduciary Management Services’ . This sets out what TPR believes to be the pros and cons of the different categories of providers. This may be a useful starting point to consider the different types of approaches but we would argue it is over-simplified.
That doesn’t mean the TPE decision needs be complex. In fact, there are probably only two questions you need to answer:
- What do you consider to be a good outcome for your fiduciary manager selection exercise?
- What input are you expecting from a TPE, and which firms are credible at delivering this?
The first question is one you should be able to answer yourselves as a trustee board and it depends on your focus:
- Investment: are you wanting to select a manager whose investment approach aligns with your future strategic investment requirements?
- Operations: are you wanting to drill down into the intricacies of different fiduciary managers’ operations?
- Governance: are you more focused on the tender process itself?
All credible TPE firms should be able to serve your requirements in each of these areas, but to differing degrees and with different areas of specialism.
The second question about the input and credibility of TPE services is subjective. Key factors which we would encourage trustees to take into account are:
- Background: has the TPE provided fiduciary management tender services in the UK for a substantive period of time?
- Experience: has the TPE past experience of advising pension funds with similar circumstances to your own?
- Research: does the TPE routinely carry out research and due diligence of the full UK market of fiduciary managers? Moreover, what is the nature and quality of this research?
- Team capacity: does the TPE have sufficient capacity to guide you through a smooth tender process?
If you have already started to engage with fiduciary managers, why not ask them for their views on which TPEs they consider to be credible? Find out which TPEs are active in advising clients, which conduct thorough research and which follow professional tender processes.
With all that said, if I was standing in the shoes of a pension fund trustee, my focus would be on how a fiduciary manager invests. Fiduciary management selection is far more than a run-of-the-mill procurement exercise. Due to the range of approaches and portfolios used, it is in itself an investment decision – and one of the most important investment decisions you will make as a trustee.
Whether you are re-tendering your existing fiduciary arrangements or you are appointing a fiduciary manager the first time, my advice would be to make sure your choice of TPE is outcome driven and one with a strong track record.
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