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European pension schemes seek esoteric assets, improved governance
In UK, high fees, poor performance prompt schemes to re-tender, appoint fiduciary managers
3 Nov 2020 | The Asset

Pension schemes throughout Europe are increasingly considering appointing fiduciary managers with the aim of gaining access to more esoteric asset classes and improving their governance, according to recent report.

The report by Cerulli Associates, which shows that the UK and Netherlands are the key markets in Europe for fiduciary management, estimates that UK fiduciary assets under management stood at 205 billion pounds sterling (US$253 billion) at the end of 2019.

Defined benefit (DB) schemes currently make up the largest proportion of the UK’s fiduciary assets – more than 72% at the end of last year. However, the defined contribution (DC) schemes’ share of fiduciary assets are expected to experience much stronger growth over the next three to five years. Demand for fiduciary management in the UK DC space will be driven primarily by small, trust-based DC schemes.

Dutch pension assets exceeded 1.7 trillion euros (US$1.9 trillion) in 2019 and approximately 88% of those assets were under fiduciary management. New business opportunities in the Dutch fiduciary market are expected to come largely from manager turnover.

Compared with the UK and the Netherlands, the Irish fiduciary management market is still relatively small, but market participants expect it to grow. The most recent data shows that around 37 billion euros of total Irish pension assets were managed on a fiduciary or delegated basis as of 2018.

Portfolio customization, according to the report, is predicted to become a key important factor in winning and retaining fiduciary business in the next three to five years.

“Pension schemes want to make sure that fiduciary managers can meet their specific investment goals, including integrating environmental, social, and governance factors into their investment portfolios,” says Justina Deveikyte, an associate director of Cerulli’s European institutional research team. “In addition to developing their responsible investment practices, fiduciary managers should consider broadening the range of ancillary services they offer in order to win more business.”

Under rules that came into force in December 2019, trustees in the UK must run a competitive tender for any fiduciary mandate worth 20% or more of the scheme’s total assets. For existing mandates worth more than 20% of total assets, trustees must run a beauty parade within five years of the original appointment. If this five-year period has already passed, or will expire in the next two years, the trustees will need to run a competitive tender within the next two years.

“UK fiduciary managers have responded by bolstering their fiduciary teams and preparing for what is predicted to be a deluge of new and retendered mandates,” Deveikyte adds. “However, some wonder whether trustees are just going through the motions and will simply rehire their incumbent providers rather than move to new fiduciary managers.

According to the report, only around 22% of DB scheme respondents plan to re-tender their fiduciary mandates within 12 to 24 months and more than half plan to do so only in three years’ time. However, conversations with major search consultants and fiduciary managers in the UK suggest that most expect to see around 300 to 400 re-tenders in the market by June 2021.

Around two-thirds of the UK DB schemes surveyed in the report say that high fees are their main reason for re-tendering. They identified poor performance and conflicts of interest as the second- and third-most-important reasons for deciding to re-tender or to switch fiduciary manager.