The recent CACEIS sponsored Fiduciary Management Breakfast Briefing on 7 April 2022, kindly hosted by Eversheds Sutherland LLP, saw a diverse panel of industry experts come together and engage in informative discussion on the topic of sustainable governance within the UK Fiduciary Management industry.
The panel included:
Natalie Winterfrost (Director, LawDeb) Panel chair
Simon Daniel (Partner, Eversheds Sutherland) Covered the importance & establishment of a Governance Framework when appointing an FM
Simon Partridge (Head of FM Solutions, Russell Investments) Highlighted how Fiduciary Managers can add value to Trustee Boards through appointing an FM
Peter Dorward (Managing Director, I C Select) Discussed the importance of maintaining ongoing independent oversite of the governance process once an FM had been appointed
Scott Foster (Head of Digital & Product, CACEIS) Focused on the importance of reliable, accurate, data supplied to Trustee Boards to support their governance processes
We’ve summarised some of the key themes that resulted from the panel discussion below.
The pivotal role played by fiduciary managers
From a high-level perspective, FM is about improving the governance structures of trustee-based pension schemes. It provides a helpful combination in terms of both delivering valuable investment advice while also outsourcing the day-to-day management of the pension scheme’s investment responsibilities. For example, FMs can take on the responsibility for setting asset allocation levels and adjusting allocation over time, and in particular de-risking, while also ensuring managers are fit for purpose and that pension schemes are keeping up to date with regulatory requirements.
Investment governance can be particularly challenging for many trustee boards, which is why so many have turned to FMs to relieve the burden. Close to 1,000 pension schemes or pension mandates have implemented FM, which works out at over £225 billion of pension scheme assets. It was noted that the recent investment market volatility has helped FMs to demonstrate their worth, particularly when it comes to making asset allocation decisions and rebalancing portfolios to reflect changing market conditions.
The changing role of governance in a fiduciary management relationship
Trustee boards should establish a governance structure for the FM relationship. This might include an ongoing assessment of investment objectives and an operational perspective, to ensure that the FM’s performance meets the trustee board’s beliefs and objectives. It was also noted by the panel that consultants usually have oversight of the investment managers - however, when an FM is appointed, this oversight falls away and needs to be considered.
So while FM is clearly very helpful to trustee boards in terms of investment decision making and execution, it is also important to recognise that there are certain elements of trustee responsibilities that are just not suitable for delegation. You can never delegate everything in terms of investment processes, so entering into a relationship with an FM does not absolve trustees of their governance responsibilities.
Instead, it means embracing a new set of governance considerations, which could involve trustee boards establishing a governance framework to assess the work of the FM and determining what data they need in order to be able to fulfil these ongoing assessments.
The importance of independence
For pension scheme trustees, the basic principles enshrined in the 1995 Pensions Act requires them to take advice on making investments in the first allocation - they also have to be satisfied that any retained investments continue to be suitable. The appointment of an FM is particularly important where you have an investment manager investing in their own in-house funds rather than allocating to third-party managers. Suitability is therefore something that a trustee board should be evaluating periodically, especially as having a whole-of-market perspective is essential for effective FM.
Setting strategic objectives
It was observed that sometimes trustee boards can fall into the trap of spending more time thinking about their investment principles without really developing what those principles mean in terms of establishing the FM relationship. Trustees can sometimes also become overly reliant on the FM to help guide them to what the strategic objectives might be where in reality a better process would involve the trustees setting the strategic objectives at the point of appointing the FM, and for boards to consider the cultural and technical aspects of the relationship.
Strategic investment objectives should not be set in stone but instead be seen as fluid and evolving as the investment discussions progress and the FM provides advice to trustees.
The growing importance of ‘decision useful’ data gathering and analysis
One of the real challenges faced by pension schemes is around data reporting and how that shapes the context of fiduciary management. Every pension scheme should have its own data strategy that ensures they can handle the large volumes of data now coming into the boardroom. This data needs to be suitable, accurate, available, timely, easily tracked and measured.
Trustee-level data requirements now include valuations, standardised performance, risk, trade and settlement data, which in turn sit alongside governance and regulatory reporting data (cost disclosures, assessment of value, etc). Added to these are the environmental, social and governance (ESG) and Task Force on Climate-Related Financial Disclosures (TCFD) data. These have become an integral part of pension scheme risk management, with TCFD regulations on pension schemes now introduced to the financial services industry as a whole. Making effective use of a reliable data partner should now be a core part of a trustee board’s overall data strategy.
The definition of a data strategy makes all of this available data easier to understand and has become a key issue for trustees, providing it’s available in consolidated reporting formats. Working with a data provider can help to ensure that the data provided is independent of the relationship with the FM, providing the all-important independent oversight and offering a ‘birds-eye-view’ while helping to avoid potential conflicts of interest. But it is also important for FMs to have a strong strategic relationship with data custodians, thereby ensuring that everyone is confident the information presented to trustees is consistent, authoritative and easy to understand. Even if the FM has their own interpretation of this data, it helps to have thesecollaborative, interactive and communicative relationships forged from the beginning of the relationship, or as soon as possible thereafter.
The panel noted that trustee boards will increasingly expect to see consolidated reporting of their ESG and climate risks from their FM, rather than individual reports from different investment managers. Pension schemes that have specific targets, such as ‘Net Zero’, will require this level of consolidated reporting.
Another area to consider is the shift from ‘supply-side’ to ‘demand-side’. Supply side – asset managers – usually lead by emphasising their funds or mandates that are ESG/climate or SFDR compliant. But the power is shifting to the demand side – the pension schemes – that require funds or investment strategies that meet their ESG or climate principles.
Alignment of ESG and climate beliefS
In addition to presenting specific data challenges, ESG and climate risks also create governance concerns for trustees, and should have an influence on their relationship with the FM from the outset. For example, should trustees appoint an FM that demonstrates an alignment with their own ESG and climate beliefs? And just how far should trustees be able to delegate ESG-related and climate risk decisions to the FM?
It is worth reiterating that the trustee board and the trustees themselves are responsible for determining the ESG and climate risk principles of their own pension scheme members, in addition to the principles and capabilities of their FM. They should know whether the FM is setting the net zero target for all portfolios under their management, as well as how net zero ambitions are embedded in the way the manager runs their own business. It’s also important for trustees to consider comprehensive governance arrangements in terms of stewardship and engagement. While more ESG and climate data is available now than ever before, pension scheme trustees still have a responsibility to interpret that data in meaningful ways, and to ensure it is capable of helping them to meet their scheme’s long-term ESG or climate objectives.
Finally, governance around costs must not be forgotten.
Summary
Collectively, these governance considerations help trustee boards to be confident that potential conflicts of interest are not impacting advice and decisions. The need for improved, and clearly evidenced, sustainable governance has created demand from pension scheme trustees for regular and better quality data to fulfil their fiduciary duties. While FMs have an increasingly important role to play in helping pension scheme trustees, governance is not something that can simply be delegated away. FM is not a panacea for investment governance but it can become an important step towards an improved set of governance considerations, especially around cost, ESG and climate principles.
