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Musings

The CMA Final Report on Investment Consultancy and Fiduciary Management

February 2019

The Competition and Markets Authority (CMA) recently published its final report on the investment consultant (IC) and fiduciary management (FM) markets and it is expected that the new ‘regime’ for
engagement with ICs and FMs will be in place around the end of the year.

In our view, there is now sufficient clarity and certainty for trustees to start reviewing their arrangements to check that they are consistent with the new regime. In addition, those trustees who have put off reviews pending the CMA’s findings can now act.

Trustees should review the CMA’s recommendations and identify any findings that are relevant to their scheme. Key considerations or actions may include:

  • Reviewing existing IC and FM objectives. Are they: appropriate given their scheme’s context, clear, realistic and measurable. Having clear objectives is essential for all schemes and if a scheme is likely to have an obligation to conduct a tender process, having a well-defined set of objectives will help to make the process is efficient.
  • Reviewing which governance model is appropriate. Ensuring that investment arrangements and the governance approach used are consistent is essential. For schemes that accept the need for complex investment arrangements but have limited internal resources, FM is likely to be the right solution; for schemes that require a straightforward investment structure it may represent an unnecessary expense.
  • Conducting an FM re-tender. Schemes that are required to tender an existing FM mandate should take care not to treat this as a compliance exercise, nor to automatically put the tender off for the maximum allowable period (five years). Instead, the process will provide an opportunity to add value by re-affirming the reasons for appointing an FM, to sense check how their scheme’s needs have changed and to assess the effectiveness of the incumbent provider relative to the competition. In addition, FM fees have fallen significantly over the last few years so reviewing sooner rather than later is likely to reduce ongoing costs.
  • Designing an ongoing review programme. Although more detailed regulatory guidance is awaited, we anticipate that there will continue to be a requirement to conduct regular reviews of ICs and FMs. Many schemes will conduct these reviews every three to five years, but annual ‘light touch’ reviews and more regular input from a third party can also be helpful.

Many schemes will be affected by these changes, and trustees should act sooner rather than later to identify the impact on their scheme and develop an action plan. Given the range and potential complexity of the issues to be considered, many trustees are likely to find it helpful to use an independent third-party evaluator to support them through reviews and any subsequent changes.

Chris Fagan shares his thoughts on the CMA's provisional decision

July 2018

The CMA produced its long awaited ‘Provisional Decision report’ this week (330 pages plus a 168‑page appendix).

In short, its key finding was that, whilst the market is not overly concentrated and hence uncompetitive, there are a few things that could be changed to make it more competitive. Some of these relate to the behaviour of investment consultants and fiduciary managers; most of them relate to improving investment governance generally. The CMA notes that more engaged trustees get better results. Or to put it another way – better governance gets better results – not a surprise to Muse of course!

So, what does the CMA say should be done? Improve governance by:

  • compulsory tendering when appointing a fiduciary manager and compulsory retendering of some existing mandates
  • forcing combined investment consulting and fiduciary firms to make it clear when they are pushing their own products
  • introducing standards for performance reporting and more detailed fee breakdowns
  • ensuring that trustees set clear objectives for their investment consultants

To help trustees, the CMA suggests that The Regulator should provide guidance on tendering and the FCA’s remit should be extended to cover more services provided by consultants and fiduciary managers.

The CMA has stopped short of forcing a structural change on the industry (for example outlawing combined investment consultants and fiduciary managers).

We think that the proposals are proportionate to the issues identified and, if implemented well, the governance enhancements should help to improve outcomes. Implementation will be key of course. In particular: any new tendering process must be robust. It must be a proper review and not simply become a ‘box-ticking’ exercise. Where existing mandates are being re-tendered, anything other than a proper review is likely to result in an FM provider’s unwillingness to participate. New performance and fee information also needs to be understood and used in the right way in decision making. The investment consultants themselves have a role in ensuring that their trustee clients have clear objectives.

A lot of trustees have, understandably, put off reviewing their investment arrangements in anticipation of the CMA review. The remedies being proposed do not appear to be too demanding for the industry overall and we expect them to be adopted. Trustees who were waiting for the outcome should therefore wait no longer; good governance dictates that action should take place now.

Viewpoints

Investment consultant objectives

04 April 2019

Following its review of the investment consultant (IC) and fiduciary management (FM) markets, the CMA published draft remedies designed to improve the operation of these markets in March 2019. TPR will provide further guidance in due course, but in the meantime we identify some actions that trustees may wish to consider before setting objectives for their investment consultant. We also look at some examples of possible investment consultant objectives and consider some measurement approaches.

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Muse's Reponse to the CMA Investment Consultants Market Investigation Draft Order and Explanatory Note

12 March 2019

We welcome the CMA’s proposed remedies and the implementation approaches suggested in the Draft Order. However, good governance requires that any tendering is undertaken with pension schemes' specific characteristics and cinrcumstances in mind. This would include tendering/ review of IC appointments on which the Draft Order is silent.

We urge the CMA and TPR to ensure that the guidance created for trustees helps to ensure that compliance cannot become a ‘box-ticking’ exercise.

Our response to the CMA Investment Consultants Market Investigation Draft Order can be found here.

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CMA Review - next steps

07 February 2019

Following the CMA's final report on the investment consultant and fiduciary management markets, in our view there is now sufficient clarity and certainty for trustees to start reviewing their own arrangements. In this article we summarise the CMA’s main recommendations and highlight the actions that pension trustees could now take.

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Guides & Tools

Professional Trustee Standards: Muse's View

We responded to the consultation on Professional Trustee standards. It's not an easy challenge to grapple with and we applaud the efforts of the Working Group so far. Read our full response here.

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21st Century Trustee - Roles and Responsibilities: Muse Views

The Pensions Regulator has published the first in their series of guidance on 21st Century Trusteeship. We have some thoughts on this, which you can read here.

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Case Studies

Conflicts of interest policy


TPR says you should have one. In fact, having one can be an education in itself and helps trustees to decide what actions to take when conflicts of interest are identified.  A well-governed trustee board will treat their conflicts of interest policy as a living document to be reviewed from time to time to consider new situations as they arise.

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TPR says you should have one. In fact, having one can be an education in itself and helps trustees to decide what actions to take when conflicts of interest are identified.  A well-governed trustee board will treat their conflicts of interest policy as a living document to be reviewed from time to time to consider new situations as they arise.

Many trustee boards are alive to conflicts of interest.  They are reminded of them when relevant at each trustee meeting either at the beginning of their agenda or just before the relevant item is being discussed.  This appreciation of conflicts has usually come about through articulating and sharing identified conflicts of interest, through regular training sessions on the subject and through self-aware advisers that are at pains to set out potential conflicts of interest in any advice they may be giving.  A good chair will also have the courage to call potential conflicts of interest out so that all the issues can be aired in a fair and transparent manner.

Risk workshop


Muse facilitated a workshop for the Audit and Risk Committee of this multi‑billion‑pound scheme as part of the introduction of a new risk framework. We walked the committee through a specific administration example to help them understand what their risks were, what their risk appetite might be, the controls they should have in place, how they would be implemented and by whom and how those controls could be monitored (administrator, trustee executive or internal audit) and reported on to the committee.

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Muse facilitated a workshop for the Audit and Risk Committee of this multi‑billion‑pound scheme as part of the introduction of a new risk framework. We walked the committee through a specific administration example to help them understand what their risks were, what their risk appetite might be, the controls they should have in place, how they would be implemented and by whom and how those controls could be monitored (administrator, trustee executive or internal audit) and reported on to the committee.

This scheme had an objective to deliver a quality, member-focussed service, that was accurate, consistent, efficient and responsive. However, its current administration service was only just improving after a period of under-resourcing, data and calculation errors, breaches and member complaints. A liability management exercise was muted which the trustees knew would impose greater volumes of work on an already fragile team.

Understanding their risk appetite was essential when the trustees subsequently came to making decisions on which projects to undertake. Was the risk of not committing to the liability management exercise on the scheme’s long-term funding position greater than the risk of a poor administration service in the short term? With this knowledge, the trustees were actively able to manage the right risks in the short-term and tweak their strategy to prioritise activities over the medium to long term.

News

PE podcast - How to select the right master trust

20 March 2019

Ian McQuade discusses master trust selection and how the Regulator's authorisation and supervision regime will change the market.

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Stuart Dunn joins Muse

10 January 2019

Muse Advisory is delighted to announce that Stuart Dunn has joined the team as a Senior Consultant to support our growing Trustee Executive Services offering.

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Muse Advisory, the independent pensions management and governance consultancy, is delighted to announce that Stuart Dunn has joined the team as a Senior Consultant to support our growing Trustee Executive Services offering.

Stuart has worked at Santander for 17 years, most recently as the Scheme Pensions Manager, supporting the Trustee and Sponsor with the management of their DB pension arrangements, and leading the Trustee through their strategic agenda. Stuart is a Fellow of the Pensions Management Institute.

Avgi Gregory, CEO, said: “We are thrilled to welcome Stuart to our team. He has a broad range of experience that he will be able to bring to the benefit of our Trustee Executive and governance consulting clients. He combines the strong governance and management expertise with the corporate background and skillset. Stuart is a great addition to Muse and a perfect fit with our independent thinking and pragmatic approach in an environment that is continually challenging for clients.”

Stuart Dunn commented: “I am excited to be joining Muse. I have worked with Muse as a client and have found their values of integrity, independence and transparency are evidenced in the quality of the work they do and their approach to clients – all values I share. I am excited to be a part of this team and to be able to work with some of Muse’s fantastic clients supporting Trustee Boards fulfil their agenda and strategies.”

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