An interview with Antony Miller, Trustees Director and Chief Executive Office, 20-20 Trustees Limited. We spoke to Anthony about the lessons learned from their implementation and monitoring approaches.

Ben McNamara: What are the key reasons for outsourcing investment management?

Antony Miller: The reasons vary between schemes, albeit most of the time it is governance driven. A fiduciary manager is able to monitor the strategy on a real-time basis (or daily at least). This enables them to react quickly, taking advantage of short-term opportunities or moving to avoid problems. In other cases, it’s more about delegating strategic decision making to investment professionals. Whilst professional and lay trustees often think they are investment savvy, they are deluding themselves and the people they work with.

At best they will understand some investment markets and have a general idea about other areas. In a career of nearly 30 years, I have been involved with hundreds of pension schemes of all shapes and sizes, and I’ve only met two trustees who I would class as investment experts.

Ben: What is 2020’s approach to monitoring?

Antony: We tend to adopt a consistent approach across our schemes. We require regular reporting on performance, focusing on funding levels, typically at every trustee meeting. This would include details of triggers, whether they have been acted upon or not. We require sufficient information to allow us to review their performance in each of the key areas of sector and fund/ stock section, as well as this we compare the fund managers they use against their peers.

Every three years we commission an independent investment consultant to review the performance of the fiduciary managers against both their peers and our agreed objectives and strategy.

Ben: What are the challenges and benefits of outsourcing?

Antony: Sometimes it’s hard to get fiduciary managers to think like trustees. As such, it can take a while to tailor their reporting so that we receive all of the information that we need. The fiduciary managers that have stemmed from the consultancy world are typically better at this than those that come from investment management backgrounds.

Some fiduciary managers have quite a narrow focus and can struggle to understand the dynamic relationship between trustees, the scheme’s sponsors and other stakeholders. As such they may not appreciate the full impact of investment decisions. The decision as to whether and when to reduce investment risk can depend on many factors, including a sponsor’s financial position and attitude, which can also change over time.

One has to take care over costs. There is a huge discrepancy between the costs being charged on different schemes and, to some extent, fiduciary managers have been given an easy ride. We have found that pricing isn’t always consistent even when a very similar service is being provided by the same fiduciary manager. Typically, costs fall significantly once a trustee who understands the delegated market is appointed.

Costs are coming down as competition has grown, but it’s not uncommon for fiduciary management fees to fall 10 to 20 basis points when they are challenged. Obviously, one has to be careful that such falls don’t result in a move to funds that generate lower value. Net performance for a given level of risk is what matters most.

Another area to watch is the impact on the pension disclosures in corporate accounts. It is important that sponsors are involved when strategy and triggers are set, and that they are promptly notified of changes that are made. The models that they use are questionable and over reliance on them can be dangerous. How many ‘1 in 20 year events’ will we have to experience in a 10 year period for them to realise that these models need updating?

In terms of benefits, there is now more comfort that someone is watching your back between meetings. Fiduciary managers can be far more nimble than pension scheme trustees, and these managers can provide wider access to certain markets and funds for smaller pension schemes, often at competitive pricing.

Fiduciary managers are also classed as beneficial owners, which reduces the onus on trustees vis-à-vis money laundering requirements.

Ben: What do you hope and expect the Competition Markets Authority (CMA) to conclude?

Antony: Obviously, we want what’s best for members. There have undoubtedly been instances where schemes have moved to fiduciary managers without understanding the ramifications of their decisions, and have ended up paying far more than they should have.

That said, we generally expect that most moves to fiduciary management have been positive. We believe that forcing trustees to review their options (and thereby take informed decisions) is positive, but that also needs to be weighed against the respective costs of such reviews. I personally believe that good trustees are unlikely to rush into such matters, and therefore the issue is more about the experience and quality of trustees than of fiduciary management.

I expect the CMA to conclude that there has been a lack of competition/ market testing as a result of conflicts of interest and that many customers have been overpaying for services. They may decide that (to rectify the position) advisors will not be able to put forward other parts of their business as fiduciary managers without an audit trail of market testing. I don’t think they’ll go as far as forcing fiduciary management business lines to separate from consulting groups, but I wouldn’t bet against it. I expect that they will require fiduciary managers to be very clear about charging structures. However, we believe that it’s the net performance that matter, rather than absolute fee levels. Regardless of the outcome of this, our approach to implementation and monitoring won’t change.

We already market test and regularly review our fiduciary managers.

My advice to other trustees would be to make sure your boards have sufficient experience and knowledge to make these types of important decisions. You are dealing with very large amounts of other people’s money in a highly complex environment. So, as a minimum, use an independent advisor to help you make and periodically review such decisions.

Always appreciate that everyone has their own objective which may not tally with your own.

This interview is an excerpt from the Investment Outsourcing for Institutional Investors 2018 report. You can download the full report for free online.

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