1 Keith Ambachtsheer, Ronald Capelle, and Hubert Lum. Pension fund governance today: strengths, weaknesses and opportunities for improvement. Working paper submitted to the Financial Analysts Journal. October 2006. Gordon L.
Clark and Roger Urwin. Best-Practice Investment Management: Lessons for Asset Owners from the Oxford-Watson Wyatt Project on Governance. September 2007.
2 Best practice investment governance for all pension schemes starts with considerations of size and diversity. After all, smaller decision making bodies with defined accountabilities perform better than large, while cognitive diversity, deriving from differences in gender, age, ethnicity, socio economic, educational and cultural background and neurology, further optimises decision making.
3 With their diverse return drivers, long-term cash flows that are often implicitly or explicitly linked to inflation and returns that are often less sensitive than equity or credit returns to the macroeconomic environment, illiquid assets, such as real estate and social and economic infrastructure equity and debt, typically offer a markedly different risk-return profile and pattern of returns to that of public equity and credit markets. See: It’s time for investment to do more of the heavy lifting. Chris Wagstaff. Columbia Threadneedle Investments. June 2019. pp.15-17. https://www.columbiathreadneedle.co.uk/uploads/2020/10/ed4862f1e10c34221269b5282dd34337/en_generating_better_
4 The Pensions Regulator (TPR) estimates there are 50 trust-based DC schemes with assets of £250m or more, of which 30 are master trusts, and 140 schemes with 5,000 or more members. These estimates exclude the UK’s 1,560 contract-based occupational DC schemes. See: Investment DC Trust Scheme Return Data 2020-2021. The Pensions Regulator. 31 March 2021. Some sponsoring employers of contract-based DC schemes, which are overseen by Independent Governance Committees (IGCs), add another layer of governance by setting up their own DC governance committees, advised by an investment consultant, to yet further enhance the member experience and secure good retirement outcomes. This they do by working with the pension provider, and ultimately the IGC, on matters such as the provision of bespoke DC default strategies and self select funds, member communications and negotiating charges. Additionally, better governed DC schemes are accredited with The Pension Quality Mark (PQM), developed by the PLSA in 2009. This accreditation is designed to increase confidence in pensions by helping employers to independently demonstrate the quality of their DC scheme.
5 PPF 7800 Index. The Pension Protection Fund. 30 April 2021.
6 See: The Pensions Regulator (31 March 2021). op.cit.
7 This shouldn’t come as a surprise given that 94% of private sector DB schemes have assets of less than £1bn, while 72% have assets of less than £100m. See: The Purple Book 2020. The Pension Protection Fund. December 2020. Figure 3.12. p.15. Within occupational DC schemes, where 97% of memberships are in schemes being used for auto enrolment, 26,720 DC schemes comprise less than 12 members, while the average assets per member amount to £4,339. See: DC Trust (March 2021) op.cit.
8 See: Pensions Watch – editions 6 and 8. https://www.columbiathreadneedle.co.uk/en/inst/insights/
9 Recognising that scale, and with that, improved investment governance, are key drivers of better retirement outcomes, the DWP has launched a consultation to gather evidence on the barriers and opportunities for greater consolidation of occupational trust-based DC schemes with between £100m and £5bn of assets under management. See: Future of the defined contribution market: the case for greater consolidation. DWP. 21 June 2021.
10 Master trusts, as multi-employer occupational DC pension schemes, are more of an holistic governance, rather than an investment governance, solution, although the advanced level of investment governance offered by many master trusts remains a key attraction to transferring DC schemes. The UK’s 38 authorised DC Master Trusts now manage £52.8bn of assets on behalf of 18.8m members. See: DC Trust (March 2021) op. cit.
11 Full FM continues to gain traction at a faster rate than partial FM. Full FM means the manager is typically engaged under a fiduciary management agreement (FMA) to manage 100% of scheme assets, whereas under partial delegation, only a portion of the scheme assets or a portion of the Trustees’ full fiduciary responsibilities are delegated to the FM. See: UK Fiduciary Management Survey 2020. Isio. November 2020. p.3.
12 See: Isio (November 2020). op cit.
13 It should be noted that while transferring the assets and members of a DC scheme to a master trust is an abdication of Trustee responsibility, transferring a DB scheme’s assets (and not its members) to a Fiduciary Manager (FM) or Outsourced CIO (OCIO) is a delegation of Trustee duties, with the Trustee ultimately retaining fiduciary responsibility for any decisions made and actions taken by the FM or OCIO. Given this, Trustees are increasingly employing a formal oversight function to oversee and constructively challenge the activities of the FM or OCIO. See: Isio (November 2020). op cit. p.5.
14 In 2019, 63% of DB schemes delegating to a FM had < £100m of assets, while 22% had between £100m and £250m of assets. See: UK Fiduciary Management Survey 2019. KPMG. October 2019.
15 Small (largely under £50m) legacy DB schemes are also adopting the sole trustee and/or OCIO/master manager model.
16 OCIO, sometimes called the master manager model or outsourced investment management, refers to the full or partial outsourcing of a pension scheme’s investment function to a third party asset manager or investment consultant. By adopting the partial model, the scheme retains some level of fiduciary responsibility, for example separating control of investment strategy, asset allocation and asset/liability modelling from day-to-day investment and risk management operations and implementation. This separation of responsibilities might result in the OCIO focusing on: manager monitoring and selection; day-to-day liquidity management; implementation of the scheme’s RI/ ESG/climate change strategy; reporting on manager research findings, asset class positioning, risk metrics and scenario analysis, and ESG and TCFD regulatory reporting.
17 See: British Airways transfers pension assets worth £21.5bn to BlackRock. Josephine Cumbo. Financial Times. 2 June 2021.
18Search and selection services are principally provided by those investment consultants and governance specialists who do not have a master trust, fiduciary management or OCIO offering, as appropriate. 71% of FM searches in 2020 were conducted by an independent third party. See: Isio (November 2020). op.cit.p.5. This percentage is likely to increase in 2021 as schemes who have already appointed a FM without a competitive tender process for more than 20% of scheme assets, are required by the 2019 CMA Order to run a competitive tender process by the later of 5 years from the original appointment or 9 June 2021.
19 Data to 31 December 2020. Fiduciary Manager Review 2021. XPS. May 2021. p.8. Compared to previous years, the 2020 FM results were characterised by heightened levels of volatility and little correlation between the volatility associated with the resultant returns.
20 Around one third of FMs eliminated their losses within three months, with almost all doing so within six months. See: XPS (May 2021).op.cit.p.7.
21 This underperformance was much reduced in risk-adjusted terms.
22 Very few schemes benchmark themselves against global equities, given that the associated level of volatility of equities can be almost twice that assumed by the median FM portfolio. Although each DB scheme does, of course, have a unique target investment return and risk tolerance, and each FM has its own investment approach, a 60/40 portfolio or the median DGF, is a more appropriate benchmark, the latter especially, given the multi asset nature of FM portfolios and an associated level of volatility which typifies that assumed by the median FM.
23 A beginners guide to assessing fiduciary management performance. Isio. 27 May 2021.
24 This lack of consensus around SAA is in direct contrast to the blatant herding by the UK’s four top institutional fund managers of the 1980s and 1990s around a median asset allocation. These, so-called, balanced managers, who were each entrusted by the vast majority of UK DB schemes to manage a scheme’s entire asset portfolio, converged to a consensus asset allocation for fear of underperforming their peers with disastrous results.
25 XPS (May 2021). op.cit.p.9.
26 XPS (May 2021). op.cit.p.8.
27 Of the 12 FMs, one manager had a negative annualised return over the period, while another achieved a lower annualised return than the low governance benchmark. See: Isio (May 2021). op.cit.
28 Data to 30 June 2020. Master Trust Default Fund Performance Review. Hymans Robertson. November 2020. p.6.
29 Hymans Robertson (November 2020). op.cit.p.9. However, in the consolidation phase, with values being predicted five years prior to retirement, and the pre-retirement phase, one year from retirement, the dispersion around outcomes within and between providers was even more elevated.
30 See: Wagstaff (June 2019). op.cit.
31 See: Master trust default fund performance improves despite pandemic volatility. Duncan Ferris. Pensions Age. 8 June 2021.
32 DWP (June 2021). op.cit.