The evolution of fiduciary management
The last year has been one of dramatic change.
2023 began with the fallout from the Gilts crisis. For many schemes, journey plans accelerated and deficits became surpluses. Buy-ins and buyouts reached record levels, including the Walgreens Boots Alliance transaction on which Cardano acted as lead advisor.
One superfund stepped forward, another back, adding a new pitstop on the way to buyout. Professional trustee (PT) firms consolidated, and we saw an increase in corporate sole trustee (CST) appointments. Once a solution for small schemes, CST is increasingly popular for schemes of all sizes.
That all means companies’ and trustees’ needs are changing, so fiduciary management will continue to evolve.
Looking ahead to 2024, the Pensions Regulator’s new DB Funding Code and “Mansion House reforms”, while somewhat mysterious, may lead to more change in an election year.
We foresee the following changes, most of which are already underway:
- Fiduciary management and outsourced chief investment officer (OCIO) approaches will play a growing role in some PT firms’ initiatives to centralise, scale and quality-control governance and implementation for small and mid-sized schemes, many with CSTs. This will require flexibility in fiduciary managers’ services, innovation in client reporting, and new approaches to pricing.
- Bespoke liability driven investing (LDI) strategies, whether segregated mandates or pooled funds-of-one, will be a competitive advantage for some fiduciary managers as trustees and third-party evaluators reflect on the lessons of the Autumn 2022 Gilts crisis, the importance of scheme-specific collateral flexibility, and the speed in trading into insurers’ price lock portfolios. Why wouldn’t you opt for bespoke LDI over commingled pooled funds at similar price points? The price points are similar for schemes with £150million+ in total assets or a £60million+ capital allocation to LDI?
- Fiduciary managers will up their reporting games on sustainability and ESG issues. The gold standard means going beyond descriptive portfolio statistics. It means providing management information to help trustees understand trade-offs and hold fiduciary managers to account on decisions. It means analytics that go beyond just carbon to focus on water usage, biodiversity, human rights, etc.
- Fiduciary managers will more explicitly offer dual-track solutions for schemes who want:
- Buyout: Fiduciary managers will continue to monitor and report on funding versus buyout liabilities. But they’ll also do more to help clients cross the finish line. They’ll take a more active role in critical workstreams, choreographing activities with administrators and other advisors at least a year before full funding. Fiduciary managers will be held accountable for transitions to price lock portfolios, including the disposal of illiquids. We’re also likely to see some fiduciary managers broker risk transfers themselves.
- Run-off: Fiduciary managers’ governance frameworks, investment portfolios and risk controls will look more like insurers’. Market risk will narrow to interest rates, inflation, and credit (sovereign, public, private, and secured). At the same time, other risks will grow in relative importance e.g. liquidity risk, operational risk, and counterparty risk. The expertise required will be deep and practical, favouring asset managers i.e. the fiduciary providers who are direct market participants, not managers-of-managers.
With all considered, new thinking and new skills will definitely be required in 2024 to navigate the changes affecting pension decision-making and fiduciary management services. Diversity in all its forms – identity, biography, cognition – will be critical in driving good outcomes for scheme members and commercial success for the firms that serve them.