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Tender for fiduciary management services

This guide helps trustees understand their legal duties and sets out approaches to tendering for fiduciary management services.

Introduction

Purpose of this guidance

This guidance is for trustees of occupational pension schemes considering appointing a fiduciary manager. It is also for trustees of occupational pension schemes who already have a fiduciary manager and are currently considering a re-tendering exercise. It will also be of interest to advisers and employers.

This guidance will provide you with practical information and key matters to consider when putting together a competitive tender exercise to appoint a fiduciary manager. This is intended to assist trustees subject to the legal requirement to carry out a competitive tendering process when appointing fiduciary managers in relation to 20% or more of scheme assets. In addition, even where the new requirement might not apply, we consider the principles outlined in this guidance to be relevant to the governance of the scheme and trustees may consider it appropriate to carry out competitive tender exercises even when not legally required to do so. It has therefore been written with those parties in mind.

We use phrases such as the ‘law requires’ and ‘you must’ to indicate legal duties, and ‘you should’ to indicate good practice approaches to meeting the requirement to run a competitive tender.

Potential benefits of tendering

Running a tender exercise is part of good governance. It can enable you to get value for money from service providers and help you to better understand the range of models and services available in the market with a view to selecting a provider that is more likely to meet your scheme’s needs and objectives. The Competition and Markets Authority (CMA) found in its 2018 Investment Consultancy Market Investigation that trustees who tendered for fiduciary management services were more likely to pay less and receive better quality service.

Duties to carry out a competitive tender for fiduciary management appointment were introduced by the Competition and Markets Authority Investment Consultancy and Fiduciary Management Market Investigation Order 2019 (the CMA Order). These are described further in the section understanding your legal duties. The Department for Work and Pensions intends to bring these duties into pensions legislation during in 2020 and we will make the necessary amendments to ensure references to legal duties are consistent with pensions legislation.

Even if you are not subject to the legal requirement, you should consider whether it would be in the best interests of the scheme to run a tender exercise when considering fiduciary management.

After you have appointed a fiduciary manager as part of a competitive tender process, you should review the fiduciary manager’s performance and periodically review the market to consider whether it is appropriate to run a re-tender exercise. The investment industry continues to develop and innovate and running a re-tender exercise will enable you to check if you are still receiving good value for money and gain an awareness of new models and services available in the market. This can support an informed decision to either stay with your existing provider on current terms, negotiate improved terms or switch.

Understanding your legal duties

The legal requirements to carry out a competitive tender when appointing a fiduciary manager are as follows, unless an exemption applies:

Requirement to tender for new mandates

From 10 December 2019, for any agreement(s) with a fiduciary manager that would result in 20% or more of scheme assets being delegated (as at the date of the proposed agreement) you must:

  • not enter into the agreement without carrying out a competitive tender process
  • provide the fiduciary manager with confirmation in writing that they have been selected as a result of a competitive tender process before entering into the agreement. Fiduciary managers are also prohibited from entering into the agreement without this confirmation.

For these purposes the 20% will include all agreements with fiduciary managers, including existing agreements.

Existing mandates

Where you have existing fiduciary management agreements which collectively account for 20% or more of scheme assets and you:

  • entered into one or more of those agreements before 10 June 2019, and
  • some or all of those agreements did not result from a competitive tender process

Then for all fiduciary management appointments that were not competitively tendered you must:

  • carry out a competitive tender process, and
  • complete the competitive tender process for all these appointments within five years from the date of commencement of the first fiduciary management agreement, which was not competitively tendered.

Where the five-year period expires before, on, or within two years of 10 June 2019, you must complete a competitive re-tender no later than 9 June 2021.

Trustees should consider the length of time it will take to run the tender exercise and plan ahead to ensure the exercise is completed within their deadline. Failure to complete the tender within the specified deadline with result in a breach of the CMA’s Order.

Examples of deadlines for tender

Please note the examples below assume that the trustees did not carry out a competitive tender exercise when they appointed their fiduciary manager.

Five-year period expires before the CMA Order is made

The trustees appointed their fiduciary manager on 10 May 2014. The five-year period expires on 9 May 2019, one month before the CMA Order was made on 10 June 2019. The trustees must complete a tender exercise no later than 9 June 2021.

Five-year period expires within two years of the CMA Order being made

The trustees appointed their fiduciary manager on 1 December 2015. The five-year period expires on 30 November 2020, which is less than two years from the date the CMA Order was made on 10 June 2019. The trustees must complete a tender exercise no later than 9 June 2021.

Five-year period expires over two years from the CMA Order being made

The trustees appoint their fiduciary manager on 1 April 2017. The five-year period expires on 31 March 2022. The trustees must complete a tender exercise no later than 31 March 2022.

Multiple fiduciary manager appointments

The trustees have two fiduciary managers, the first was appointed on 1 February 2017 and the second was appointed on 1 December 2018. The trustees must complete a competitive tender exercise no later than 31 January 2022 as the five-year deadline relates to the earliest appointment, which was not subject to a competitive tender.

Reasonable endeavours

The law requires you to use reasonable endeavours to obtain bids from at least three unrelated fiduciary managers and to evaluate the bids received. The number of providers you invite to formally tender should be proportionate to the size and complexity of your scheme. However, you should invite as many providers as is reasonable. It is likely to be prudent to approach more than three providers to ensure that you obtain the best value for your scheme and to increase the likelihood of obtaining at least three bids.

Documenting compliance

You should document the tender process you have followed, the decisions you made and the reasons why. This may include, for example, your criteria for selection, details of the process you followed to reach a shortlist of providers, key decisions made and your reasons for making them. Maintaining an audit trail will support you in demonstrating compliance with the requirement to run a competitive tender process. Even if you are unsuccessful in receiving three independent bids, you should still document the process you followed to demonstrate that you used reasonable endeavours.

Small schemes

Trustees of smaller schemes seeking fiduciary management services should be aware that the number of providers willing to respond to invitations to tender from a small scheme may be more limited. You may wish to consider speaking to or issuing an expression of interest request to a number of providers in advance of issuing full invitations to tender, to gauge the providers’ appetite to respond.

This can reduce time and resource spent on issuing invitations to tender (and potentially reviewing responses to tenders) from providers who are unlikely to respond with competitive bids and can increase your success rate in receiving bids. If you intend to use a third party evaluator, they can support you in identifying which providers are more likely to offer fiduciary management services and competitive terms to your scheme.

Types of fiduciary management

When considering using a fiduciary management service, you should have a clear understanding of how services might be delivered, their respective strengths and weaknesses and how the service model may differ between different providers.

There are a number of different approaches to fiduciary management, which are reflected in the range of services currently offered in the market by providers. Fiduciary management can sometimes be referred to by other names, such as ‘delegated investment consulting’, ‘implemented consulting’ or ‘outsourced Chief Investment Officer (CIO)’.

The main providers of fiduciary management services are:

  • specialist/boutique firms whose sole business is based on fiduciary management services
  • firms linked to investment consultants/advisory firms, and
  • fund managers who offer fiduciary management as part of their broad product range

While fiduciary managers provide similar services, there can be significant differences in approach between firms in different market segments and within the same market segment. For example, one fiduciary management firm which is linked with an investment consultancy firm will not necessarily operate and deliver fiduciary management in the same way as another firm linked with an investment consultancy. These differences can include, for example:

  • the way in which portfolios are constructed and risk is managed
  • the range and management style of investments that might be included, for example some fiduciary managers may focus on actively managed alternative investments and illiquid opportunities, while others may favour a passive approach
  • the holding structure for the investments. For example, some holding structures would allow the existing investments to be transferred efficiently with limited impact on value to a new investment or fiduciary manager, whereas some other structures could involve significant costs and loss of value on transfer
  • the level of resource invested in fiduciary management
  • the approach taken to operational risk management
  • the level of ongoing strategic investment advice and training provided and the extent to which investment decisions are delegated to the fiduciary manager
  • the market segment and scheme scale that is targeted, and
  • the approach taken to the integration of environmental, social and governance (ESG) including climate impact within the investment and risk management strategies

Fiduciary management has developed in the UK over the last 15 years and the range of services offered are continuing to develop in defined benefit (DB) and defined contribution (DC) schemes. As the market has developed, opportunities for improved mandate structuring, improved fee terms and better mandate terms and conditions have arisen. When preparing to tender for a fiduciary manager provider or when reviewing your current fiduciary manager provider, you should have a good understanding of the current range of options available in the market and, if required, seek independent advice.

DC schemes and fiduciary management

The use of fiduciary management by DC schemes is currently limited but the market is developing. Fiduciary management for DC follows the same general principles of delegating investment powers and often focuses on the design and implementation of lifestyle funds. It can also include other services such as member investment communications.

There are a number of different governance structures available which involve varying levels of delegation and which, depending on their structure, may or may not meet the definition of fiduciary management.

When putting a competitive fiduciary management tender together for a DC scheme, you must use reasonable endeavours to obtain bids from three unconnected fiduciary managers. The emerging DC fiduciary market is currently limited, however, the selection exercise run by the trustees does not have to be limited just to providers of fiduciary management services. You may wish to consider including providers, who offer an alternative approach of DC provision to support them in choosing the most appropriate arrangement for their scheme. These alternative approaches may not meet the legal definition of fiduciary management, but they may have some comparable features.

You should document your attempts to obtain three bids from unconnected fiduciary managers together with any other comparable products considered.

Find out more about fiduciary management in our guidance on choosing an investment governance model.

Investment services provided under fiduciary management mandates

The range and extent of investment services provided under a fiduciary management mandate can vary significantly, depending on the scheme governance structure, the level of assets delegated and the extent to which other advisers support the trustees. The legal frameworks vary and you may need to understand the service you are being provided with and the terms and conditions that apply to that service.

For example, the investment service provided by the fiduciary manager may be provided under a discretionary fiduciary management agreement or it may be provided separately alongside an investment advisory services agreement which is also entered into with the fiduciary manager. Alternatively, the investment service may also be split between these two types of agreement, depending on individual fiduciary manager structures and terms and conditions. Where appropriate or if the trustees are unclear, you should seek appropriate advice.

When you are receiving an investment service from an investment consultant the law requires you to set strategic investment objectives for that adviser.

Please be aware that some advice elements of fiduciary management services may be subject to the requirement to set objectives, and you may wish to consider seeking professional advice as to whether this applies in light of the services you receive.

Conflicts of interest

In appointing a fiduciary manager, you should be aware of the potential for a wide range of conflicts of interest to arise. The scale of conflicts will vary and may apply to a wide range of parties that might be involved in choosing a fiduciary manager. For example:

  • The existing investment consultant may be linked directly with a firm that offers fiduciary management services or offers fiduciary management services within their wider group.
  • The existing investment consultant, who has no links with a firm that offers fiduciary management services, but who is retained on an advisory basis, will have a commercial interest in an advisory relationship continuing.
  • Some fiduciary managers may actively contribute to the design of the fiduciary mandate and performance objectives. It is important for trustees to identify and challenge if they believe objectives are favourably structured or if the performance hurdles set too low.
  • Some third party evaluators will have a commercial interest in trustees choosing fiduciary management to generate business, for example where they offer an ongoing oversight role.
  • Other third parties will have a commercial interest in assisting with the tender exercise but may not have the necessary knowledge of the fiduciary management and investment consultancy markets within the occupational pension scheme markets to advise appropriately.

Conflicts of interests may not always be a barrier to appointments or decisions being made. However, you should ensure that appropriate measures are in place to identify, mitigate and manage those conflicts. If your existing investment consultant or fiduciary manager is involved in the tendering process, you should ask them to provide, in writing, details of how the conflicts will be mitigated and managed.

Find out more about managing conflicts of interest in our conflicts of interest guidance.

Using independent third party evaluators

Once you have decided to appoint a fiduciary manager, you may wish to consider using a third party with knowledge of the fiduciary management and investment consulting markets and specific expertise in relation to evaluation of fiduciary management services and providers. The range of parties that can provide you with support on selecting an appropriate provider and running a competitive tender process is wide and there may be significant differences in the level of their existing market knowledge, research and due diligence. A third party with appropriate expertise should also support the mitigation of conflicts of interest.

While third party evaluators will add an additional cost, you may consider it a worthwhile investment, particularly if you do not have an in-house support team and if it will save you time and resources and help you to achieve a better outcome from the selection exercise. It will also help ensure that a robust process has been followed in the selection of your provider and that a clear audit trail of decisions made (and the reasons why) is prepared.

Example

The trustees of a scheme with c.£150million assets under management appointed a third party to run a formal tender process to appoint a fiduciary manager. The third party considered the range of fiduciary management products and services available in the market and ran a tender process. They also helped the trustees to negotiate the fees and contract terms, which resulted in an improvement in the contract terms and conditions offered. After allowing for the fees charged by the third party and the general expenses of running the tender exercise. This resulted in fee savings for the trustees, which were significant when considered over the expected future term of the contract.

When choosing a third party evaluator, you should be aware of their level of knowledge and understanding of the market and the services they provide. See Appendix A for examples of the main types of third party evaluators that may offer support in tendering for a fiduciary manager.

When using a third party evaluator, you should be aware of the potential for conflicts of interest to arise. You should therefore ensure that appropriate measures are in place to identify, mitigate and manage those conflicts.

Find out more in our conflicts of interest guidance.

When running any tender process, you should also consider what additional help the in-house pension team or the procurement team within the employer may be able to offer. You should be mindful of the need for specialist investment market knowledge to inform an effective tender process but may still find an in-house team are able to offer valuable support in running an effective exercise.

Key principles of a competitive tender

When selecting any adviser or service provider, you should consider running a competitive tender exercise to ensure that you obtain an appropriate service that best meets the needs of your scheme and delivers value for money. However, when selecting a fiduciary manager, unless you are exempt, you must run a competitive tender process. When designing a tender exercise, it is good practice for trustees to consider the key principles set out below. In applying the principles, trustees should consider the circumstances of their scheme and take a proportionate approach to the design of their process.

  1. Set objectives for the tender exercise: Understand what you want from a provider and how this will meet the objectives for your scheme. Make sure you have re-assessed your scheme objectives – they should be based on current analysis, relevant to your scheme circumstances and enable your longer-term objectives for the scheme to be delivered.

  2. Seek advice and consider appointing a third party to assist you: You may wish to consider using a third party to provide advice on the selection process. This will help manage conflicts of interest, provide in-depth insight into the current market and save time and resource in putting together a tender exercise. This will allow you to focus on the key decisions.

  3. Agree criteria for selection: Be clear on what you are looking for from the tender exercise and consider in advance how you will assess providers. Consider putting together a scorecard, weighting matters based on their level of importance in meeting the objectives you set for the tender exercise. Be aware that you may need to refine this, as the exercise evolves and your knowledge of the type and characteristic of the provider likely to best meet your scheme’s requirements develops.

  4. Seek to understand the full range of market opportunities: Understand the different options in the market and create a list of potential providers based on your objectives and criteria for selection. If you are using a third party, they will be able to support you in developing a longlist based on their market knowledge, research and due diligence.

  5. Select longlist of potential providers: Based on your review of the market, select a sub-set of providers and create a longlist to invite to tender. If you are using a third party, they may do this step for you and present a recommended shortlist. If this is the case, you should understand the process they followed, which providers were discounted and why.

  6. Seek expressions of interest: You may find it useful to contact providers before issuing a detailed invitation to tender. You could issue a short “expression of interest” request, which would include some high-level details of your scheme, your potential mandate requirements and a number of preliminary questions to gather relevant information. This would enable you to create a more focused longlist based on providers that are more likely to respond to a formal tender and are more likely to be suitable for your scheme. This step may be particularly useful for smaller schemes or schemes with specific or very specialised requirements. If you are using a third party, they are likely to do this on your behalf.

  7. Issue invitations to tender: Invitations to tender should focus on requesting a bespoke offering from providers that will support you in meeting the objectives you have set for the tender exercise. The invitation to tender should include a brief overview of your scheme’s current arrangements and set out the requirements for the service you are seeking. Questions in the invitation to tender should align with your agreed assessment criteria.

  8. Assess bids and select a shortlist: Compare the bids based on your agreed criteria, using your scorecard and select a shortlist of candidates to consider in more detail.

  9. Invite shortlisted providers to present their proposals: The shortlisted providers should be invited to present to the trustees. This will provide you with the opportunity to interview the candidates and discuss the services they proposed to offer in their bids in greater depth. Some trustees may find it useful to follow this with site visits with the final two or three providers to complete operational due diligence, before confirming any appointment.

Trustees may also find it useful to engage with the employer at certain points during the process, for example when determining the objectives for the exercise or when deciding the requirements for the mandate to be awarded. This can help to ensure that the longer-term objectives of the employer for the scheme are better aligned with the trustees’ implementation decision. The employer may also have in-house procurement expertise, which could assist with the tender exercise.

Running a tender process will require commitment of significant time and resource from the trustees. You should make an allowance for any upcoming tender exercises in your business plan and consider what skills, resources and training you may need to achieve the best outcome. You may wish to set up a sub-committee to carry out the day-to-day activities of the tender process or to oversee a third party you commission to carry out the tender process.

How you run the process will depend on your scheme’s governance structure and any delegations that the trustee board approves. However, there will be points in the process where involvement from the full trustee board may be required, particularly where a significant decision is to be made. For example, an opportunity to attend the final presentations or meet the preferred adviser may be offered to all the trustees before the appointment is ratified.

Agree governance and level of delegation

You should understand and document the level of decision-making you want to delegate to a fiduciary manager. You should agree and set this out before tendering as it will enable you to decide which providers’ offerings are more suited to the level of delegation you are comfortable with.

As a trustee of the pension scheme, you retain ultimate accountability for the scheme investments. Therefore, it is vital that you fully understand the roles and responsibilities being delegated and maintain appropriate oversight of the decision-making and activities of the fiduciary manager.

There are certain decisions you must retain ownership of, although a fiduciary manager may provide advice on these matters. For example, in relation to a DB scheme these decisions should include the following:

  • The strategic asset allocation to adopt for the scheme as the scheme develops.
  • The level of expected return and risk to be targeted at different time horizons (these may be set relative to the liabilities).
  • The degree of flexibility in the mandate, for example in relation to the level and range of investment in (and between) asset classes and the risk tolerances.
  • Strategic decisions on liability management, such as buy-ins of tranches of benefits and longevity hedging.
  • Decisions in relation to the extent to which environmental, social and governance (ESG) considerations - including climate change - should be reflected in the investment strategy and investment implementation of the scheme.
  • The decision to replace the scheme’s fiduciary manager, for example due to:
    • poor fiduciary mandate performance being delivered
    • the trustees deciding to adopt a different governance model for the scheme, for example once the scheme funding level had improved and/or the trustees were objective changed to targeting a buy-out of the scheme
    • the fiduciary mandate offering poor value for money and/or high costs relative to other market opportunities

Deciding who to invite to tender

Before inviting providers to tender, you should seek to understand the range of fiduciary management services and providers available. If you choose to run the exercise yourself, you may find it useful to send an expression of interest inquiry, with some high-level information on your scheme and requirements, and a number of preliminary questions to a selection of providers to gather relevant information to enable you to develop your longlist to invite to tender.

If you are using an independent third party evaluator, they will conduct research on the market and will advise you on which providers might be appropriate to include on your longlist.

Invitations to tender

An invitation to tender should focus on asking providers to recommend a bespoke investment and risk management solution based on your scheme’s needs and objectives. Your invitation to tender should include some background information on your scheme and your requirements. This might include, for example, details of the following:

  • Your scheme: The current asset allocation, the nature and duration of the scheme’s liabilities, the scheme size and the level of scheme cashflows.
  • Your objectives: This will enable the providers to demonstrate how the portfolio they propose will support you in meeting your objectives.
  • Your agreed governance structure: This will enable providers to understand the level of delegation and decision-making you are seeking.
  • Key investment beliefs: This will enable providers to demonstrate how their proposal for the mandate aligns with your key investment beliefs.
  • Exclusions: It is also useful for providers to understand if there are any particular ‘red lines’ in terms of asset classes or manager selection, for example if you do not wish the fiduciary manager to use their in-house pooled funds for investing in alternative or illiquid investments. This might be due, for example, to concerns over conflicts of interests, a requirement for ‘best of breed’ opportunities to be considered at all times, the potential difficulties in transferring the funds at a later date.

The invitation to tender should also include a number of key questions which, when combined with their answers to your requirements above, will enable you to determine which provider might be most suitable and best meet your requirements. For example, these questions could include a request to provide details of the following:

  • Their firm, their areas of expertise and relevant experience of similar arrangements.
  • Their ability to successfully identify and select investment opportunities, together with supporting evidence.
  • Their views on the current investment arrangements and the proposed fiduciary management mandate and how that might be modified or developed to enable an improved outcome to be delivered.
  • Their proposed fee structure (including any performance fee structures) and level of fees and expenses that they would expect to apply to the fund. It is important that this information is reporting consistently to enable you to compare bids. See the section on fees and costs.
  • The potential costs of transitioning into the proposed arrangement and the costs that might be incurred on future exit, if that was deemed necessary.

For further matters to consider in an invitation to tender, see Appendix C.

Reviewing fiduciary manager submissions

You should design a process that will enable you to assess each submission consistently to identify the potential fiduciary management providers that can meet your requirements. You may wish to consider designing a scorecard and applying weights to each criterion based on the level of importance of those issues in meeting your requirements.

An example of a scorecard that could be used when assessing fiduciary managers is outlined in Table 1 below. The details and weightings applied below are for illustration only and should not be taken as being representative of what might be appropriate in any particular case. In Appendix C, we have given some examples of the types of topics trustees could consider when designing an invitation to tender and deciding your criteria for scoring and selecting a provider for your scheme.

Trustees should consider their objectives in appointing a fiduciary manager for their scheme and develop an appropriate scoring system based on their requirements and with weightings applied that are appropriate for their scheme.

Each of the individual submissions are graded between 1 and 5 (1 = poor, 5 = excellent) and then weights are applied to each item to establish an overall score.
The examples below provide some topics you may wish to consider when deciding your criteria for selecting a provider and designing an invitation to tender.

Table 1: Example of a scorecard that can be used when assessing fiduciary managers

Requirements based on: Weighting Score (1-5)
Firm, scale resources 10%  
Responsible individuals 10%  
Proposed interaction 10%  
Manager selection/asset allocation 40%  
Monitoring reports 10%  
Investment/strategic views 10%  
Fees, implementation, references 10%  
Total 100%

Please note: This example is for illustrative purposes only. Weightings and requirements should be based on your objectives for the scheme’s and your trustee board requirements.

Fees and costs

It is important that you can compare the estimated costs and charges of each fiduciary manager in a consistent way to make a fair assessment of the value for money in appointing that provider.

Fiduciary management providers who are subject to the CMA Order must report the total annual costs and charges relating to the service they are proposing, and this should be expressed as both a percentage of assets under management and as a cash amount. This should also be supported by an itemisation of all costs and charges likely to be incurred over a 12-month period, such as the cost of advice and implementation, asset management fees, transaction costs, and any one-off costs likely to be incurred.

You should also expect providers to outline the expected cost of transitioning into and out of the fiduciary management service. It should also make clear which costs would be deducted directly from assets and those which would be invoiced separately. To enable you to compare bids, you should consider adding a table to your invitation to tender so that providers report the information in a consistent way and can include all the services you require. You should also allow for the impact of any tax charges that might apply in addition.

It is particularly important to understand any costs that might be incurred if a decision is made in the future to exit from the fiduciary management agreement. Depending on the proposed underlying investments and the holding structure for those investments, significant costs and exit charges could be incurred, particularly in relation to illiquid and alternative investment funds. This transition process can also be lengthy, particularly in relation to certain types of investments and fund structures, and it could take some time to fully transition the whole portfolio to another provider. It is therefore important that you are aware and understand the potential costs and restrictions that might apply if you decided to exit the agreement, before you select a preferred provider and enter into the fiduciary management agreement.

You should understand which services are included in the itemised statement and which services are not. If there are additional services you would expect to regularly recur, and you would expect to be reasonably predictable, you should also seek to get those itemised. You should also ask the provider for an estimate of the extent of incidental services, such as advice on refining the investment portfolio or legal fees that are likely to be required each year. This will enable you to obtain a fair view of the likely total annual cost and will also help you make a fair comparison between potential providers.

Example breakdown of indicative fees

  • Illustration of indicative total fees to be charged for the service each year to include a breakdown of the following:
    • Fee for core fiduciary management service including advice and implementation. Any performance management fees must be separated out from the fiduciary management fee.
    • Asset management fees covering funds or fund-of-funds provided by the fiduciary management provider, and those provided by third party asset managers. These costs and charges must include any costs associated with execution such as transaction costs and performance-related payments.
    • Other investment costs such as custodian fees, administration charges or charges for ancillary services.
  • Any one-off fees likely to be charged to include the following:
    • Estimated transaction costs likely to be incurred in moving assets into the proposed portfolio.
    • One-off fees for advice.
    • Any other one-off charges such as legal fees or costs of onboarding services.
  • Potential exit fees and costs to include the following:
    • Any explicit costs and charges that would be incurred as a result of a change of fiduciary management provider or ceasing to obtain fiduciary management services, such as exit charges or ‘lock in’ fees in the contract that would be incurred if you ended the agreement or changed fiduciary manager.
    • A statement that transaction costs might be incurred in switching provider or ceasing to obtain fiduciary management and that such costs may be similar in magnitude to those disclosed. This statement must also include any features of the proposed portfolio which might increase such transaction costs.

To support you in receiving fee information in a consistent way, the Cost Transparency Initiative (CTI) has produced a suite of voluntary templates and guidance designed to help trustees understand and compare the costs of their investment services by using a standardised reporting format.

These templates can be used to request charges information and are available on the PLSA website.

Performance

The CMA found that fiduciary managers presented their historic performance information using different approaches. This has meant it has not been easy for trustees to assess and compare the track records of fiduciary managers.

Part 6 of the CMA Order requires, by 10 December 2019, industry to put in place a standardised methodology and template for providing information on past performance to potential pension scheme trustee clients to be approved by the CMA. From the date on which a standard is approved, providers of fiduciary management services, as defined in Part 2 of the CMA Order, must use the standard in tender submissions and marketing communications to provide information on their historic performance.

The CFA Institute has acquired the intellectual property rights to a voluntary fiduciary management performance standard. Following consultation with industry and further development of the standard, the CFA Institute proposes to submit the revised standard to the CMA for approval by 10 December 2019.

We will provide further guidance to trustees on how the performance of potential providers of fiduciary management services (and how the performance of existing providers of fiduciary management services) may be assessed once a performance standard has been approved by the CMA.

Engage with shortlisted providers

Once you have reviewed and assessed the tender submissions, you may wish to eliminate a number of the managers who do not adequately meet your tender criteria. As you will be expecting to work with the fiduciary manager for a considerable period of time and the costs involved are significant, you may want to meet with the potential providers to understand how they might work with you and meet your requirements. You may want to invite your shortlisted providers to present to your board or a sub-committee responsible for the exercise and answer any questions you may have about their proposal for your scheme and any questions that may have arisen as part of their tender submissions.

Once the shortlisted candidates have presented to the board, you may have identified a clear preferred provider, or you may have narrowed your selection to a final two or three providers with whom you may seek to negotiate improved fee and service terms. You may also find it useful to go on site visits to their offices to better understand the structure of their organisation and meet the key individuals who would be responsible for looking after your scheme.

Documentation of process

When the tender process is complete, you should prepare a summary of your reasons for appointing the fiduciary manager(s) and the objectives and service standards that you expect the fiduciary manager to deliver against.

Oversight

As trustees, you remain responsible for the scheme, including setting the overall investment strategy and monitoring the activities and performance of your fiduciary management service provider. Once you have appointed your fiduciary manager, you should ensure that you regularly review their performance and their ongoing suitability as a fiduciary manager to be retained by the scheme.

The objectives you set for your fiduciary manager should be linked to your investment objectives for the scheme so that reporting of performance will allow you to review the value added by appointing a fiduciary manager.

You should be aware of the potential for organisations to change and factors that influenced your decision to appoint the fiduciary manager initially can change significantly over time. For example, the loss of key staff or key mandates, the demotion of fiduciary management as a line of service within a group organisation (with consequent impact on resourcing etc), a change in investment approach with less focus on a preferred style of asset management or a preferred asset class, or a change in risk controls.

Given the significance of the fiduciary management appointment to your future scheme outcomes, you may wish to consider using an independent third party to provide oversight of your fiduciary manager’s performance and their ongoing suitability to meet the requirements of your scheme. That third party will also be able to help you decide whether any changes in the fiduciary manager or their mandate remit are necessary.

Appendix A: Examples of third party evaluators

Pros
Investment consultants

Most investment consultancy firms that offer services to occupational pension schemes will offer a third party selection service to support you in running a tender. They will also offer advice on investment governance structures. They will have knowledge of the fiduciary management market, though the level of knowledge will vary between firms.

Some investment consultants will have teams that specialise in the selection and oversight of fiduciary managers. These firms will have specialist knowledge and will have researched the market to support the shortlisting of providers for tender. 

Professional trustees  Some professional trustees may provide guidance on governance structures. They may also support the board in running an effective tender process. They may bring experience and knowledge of using fiduciary management on other schemes.
Dedicated selection and evaluation firms

There are a number of independent third party selection firms that can support you in putting a competitive tender process together.

Some firms also specialise in governance and can provide advice on governance models.

There are also some firms that specialise in the selection and oversight of fiduciary managers. These firms have specialist knowledge and will have researched the market to support the shortlisting of providers for tender.

 Cons
Investment consultants

 If your investment consultant only offers advisory services, there may be an inherent bias in their advice on governance towards the advisory model.

If your investment consultant also offers their own fiduciary management service, there is a risk of bias towards their own fiduciary management firm and/or the style of their own fiduciary management service offering either when providing information on governance models or supporting a tender exercise.

Professional trustees

They are less likely to have detailed knowledge of the whole of market and market developments.

They may not have sufficient resource and expertise to conduct regular research and due diligence on providers in the market.

Recommendations based largely on previous experience of working with providers would not be sufficient either for shortlisting or appointing providers and would not meet the competitive tender requirements.

Decisions that should be made by the trustee board may be unduly driven by the views of the professional trustee or their firm.

Dedicated selection and evaluation firms

There are significant differences between third party selection firms, their scale, structure and experience. These can vary from sole traders to dedicated governance teams within large multi- disciplinary practices.

It is important to understand the extent of the service they can offer you. Some may be able to help run a competitive tender process, but they may not have specialist knowledge of the market to advise you appropriately and you may not achieve the best outcome for your members.

In the case of a firm that specialises in fiduciary oversight, there may be an inherent bias in their advice on governance towards the fiduciary model.

Appendix B: Scheme example, applying the principles of tendering for fiduciary management

Scheme background

This is a DB scheme with an employer that has limited affordability to pay contributions for a period of years due to the business operating in a declining sector. Despite contributions being paid, the funding level has not improved since the last formal actuarial valuation. The trustees have some investment experience but rely heavily on one trustee when making decisions based on the advice of their investment consultant. The trustees periodically considered hedging the scheme’s liabilities but had never felt comfortable in implementing a significant level of hedging.

The employer asked the trustees to consider exploring whether fiduciary management could improve the scheme funding level over time and agreed to pay reasonable costs incurred from appointing a third party evaluator to assist them with a review of their investment governance.

Reviewing investment governance capability

The third party evaluator worked with the trustees to review their existing scheme governance, which included roles and responsibilities, how the trustee board functioned and how board membership might evolve in the future. With the help of the existing investment consultant, the third party evaluator also arranged a workshop to help the trustees:

  • establish their investment beliefs
  • define their objectives for the scheme over different horizons (with participation from the employer)
  • understand different investment governance models
  • understand how their existing investment advisory governance model may be improved, and
  • understand how either a full or partial fiduciary solution could be implemented to benefit the scheme.

Following the review, the trustees and employer agreed to move the scheme’s assets into a fiduciary management mandate.

Preparing the specification

Based on the work the third party evaluator did with the trustees to review their governance capability, they put together a high-level specification for the fiduciary mandate selection which captured the trustees’ beliefs, objectives and risk tolerances for the mandate and the trustees’ general requirements for the appointment. These included the following:

  • The investment strategy put in place should target an investment return of liabilities+2.5% per annum, tapering to liabilities+1.5% after 10 years and to liabilities+0.5% after 20 years, with a funding level volatility of 8%-10%, initially tapering to 6%-8% after 10 years and 4%-6% after 20 years.
  • Over the medium to longer-term, as the funding level was expected to recover, the fiduciary manager should be able to explore opportunities to effect a liability risk transfer for segments of the membership by way of an insurance company buy-in.
  • Active management and investment in illiquid and alternative investments could add value, if the manager selection (and rotation) was done by individuals with the expertise, skills and resources necessary to be able to effect decisions on a timely basis.
  • Unrewarded risks should be hedged, diversified or transferred.
  • Assets should be invested in funds in the name of the trustees, which could be assigned to the new fiduciary manager (rather than sold for ‘cash’) if the trustees ever decided to terminate the fiduciary management contract.

Deciding who to invite to tender

The third party evaluator mapped the trustees’ high-level requirements against the full range of fiduciary management opportunities in the market, allowing for the scheme scale and characteristics, and their market knowledge of the firms (eg their size of firm, any loss of staff, loss of mandates, underperformance etc).

The third party evaluator produced a brief report for the trustees on a longlist of nine potential fiduciary managers, with a brief outline of the firms and their fiduciary management products. This list included the trustees’ existing investment consultant who had their own fiduciary management arm as they met the trustees’ high-level requirements. They also explained which fiduciary managers they discounted and why.

The third party evaluator and trustees discussed the differences, similarities, strengths and weaknesses of the nine fiduciary managers on the longlist and agreed to invite six of the fiduciary managers to formally tender.

The tender process

The third party evaluator was able to rely on their existing research and ratings of fiduciary managers to provide some of the inputs into the trustee briefing papers. To supplement this, they prepared an invitation to tender, which included:

  • the scheme background and the trustees’ reason for tendering
  • the trustees’ high-level requirements for the tender
  • the expected timeline for the tender and implementation
  • the contact details for the chair of the trustees (to enable an introductory conversation), and
  • the third party evaluator contact details for specific queries relating to the tender submission

They included a series of questions which would require firms to provide details on matters such as:

  • their firm, areas of expertise and relevant experience of similar DB arrangements
  • the individuals who would be directly responsible for their scheme
  • how they proposed to interact with the trustee, frequency of meetings, levels of trustee training
  • their ability to successfully identify and select investment opportunities, together with supporting evidence as required by the fiduciary management performance standards
  • the investment and risk monitoring reports they would produce for the trustees
  • their views on the current investment arrangements and the proposed fiduciary management mandate, and how that might be modified or developed to enable an improved outcome to be delivered
  • the timeline they proposed to implement the fiduciary management strategy if appointed
  • the potential transition costs that would be involved in on-boarding and how those costs would be managed
  • their proposed fee structure (including any performance fee structures) and level of fees and expenses that they would expect to apply to the fund, and
  • trustees they have worked with and would be prepared to provide references

The six fiduciary managers were given four weeks to respond to the invitation to tender and five responses were received. The other fiduciary manager declined to tender following an introductory call with the trustee chair, recognising that given the timescales involved and their current business commitments, they would have been unable to meet the trustees’ timeline and expectations

Reviewing bids and making a decision

With the help of the third party evaluator, the trustees assessed and graded the individual submissions between 1 and 5 (1 = poor, 5 = excellent) against a weighted scorecard agreed with the trustees. This was broadly based on the example in Table 2 below:

Table 2: Example of a scorecard that can be used when assessing tender submissions

Requirements based on: Weighting  Score (1-5) 
Firm, scale resources 10%  
Responsible individuals 10%  
Proposed interaction 10%  
Manager selection/asset allocation 10%  
Monitoring reports 10%  
Investment/strategic views 10%  
Fees, implementation, references 10%  
Total 100%  

Please note: This example is for illustrative purposes only. Weightings and requirements should be based on your objectives for the scheme’s and your trustee board requirements.

Following assessment of the written submissions, there was a clear leader and one firm which did not meet the requirements. The difference between the third and fourth ranked managers was marginal. The trustees wanted to invite three managers to present to them and decided that the fourth placed manager should be offered the opportunity to present as they offered a different proposition to the third placed manager (who offered a very similar proposition to the first two managers).

The third party evaluator invited the three managers shortlisted to present to the trustees, and the trustees were also given time to ask questions. Following the presentations, the trustees identified their preferred provider but felt that given their scheme’s scale, they might not get the level of support and service that a larger scheme might get. They also wanted to validate the bid in relation to operational due diligence and investment manager selection.

The trustees decided to do site visits to both their preferred provider and the provider ranked second. Following the site visits, the trustees concluded that, while their preferred provider would deliver the service required, the second ranked provider offered the best overall service proposition for their scheme.

The selected firm was asked to review their fees and terms and conditions, and the third party evaluator and the trustees’ legal advisers provided views on the fees and contractual terms offered. Following advice, the trustees negotiated a further reduction in annual fees.

The third party evaluator prepared a brief document setting out the process the trustees had gone through, which included the key decisions and the main reasons why those decisions were made.

The trustees subsequently agreed to appoint the third party evaluator to provide independent oversight on the performance of the fiduciary manager appointment on an ongoing basis.

Role of existing investment consultant

The trustees were mindful of conflicts that could arise due to their existing investment consultant being part of a firm whose fiduciary management arm was involved in the tender process. Their existing adviser agreed to stay at arm’s length in relation to designing and running the tender exercise but was engaged where possible to provide input on the scheme’s current circumstances. The existing investment adviser and the trustees agreed that this was essential to manage conflicts of interest. It also provided comfort to some fiduciary managers who were considering tendering but were concerned about the potential for commercial conflicts to arise due to the existing investment consultant’s connection with a competitor firm.

Appendix C: Example topics to consider as part of a fiduciary management tender exercise

The examples below provide some topics you may wish to consider when deciding your criteria for selecting a provider and designing an invitation to tender.

Corporate profile: To understand the organisational structure and their long-term commitment to fiduciary management 

  • Basic organisational details, eg registered address, contact details, type of organisation.
  • Company background.
  • Ownership structure.
  • Length of time providing fiduciary management services / commitment to market.
Operational effectiveness: To understand how effective the business is likely to be at delivering the expected service
  • Organisational structure – key roles and team resources, how the teams are structured and resourced to deliver the proposal.
  • Key person risk.
  • Recent (relevant) staff losses / details of unfilled (relevant) vacancies.
  • Training and development policies.
  • Current client base and experience of working with schemes of a similar nature.
  • Fiduciary management experience.
  • Transition management capabilities.
  • Details of recent mandates / gains and losses.
  • Details of operational risk controls and management.
  • Client references.
Governance: To understand how key decisions are made and key risks are controlled
  • Highlight any conflicts of interest.
  • Risk management and controls.
  • Assurance reports (AAF 01/06, AAF 02/07 etc).
  • Complaints.
  • Compliance breaches.
Investment approach: To understand how the fiduciary manager’s attitude to investment, risk management and investment implementation for pension schemes influences future outcomes
  • Investment beliefs.
  • Investment and risk modelling capabilities - models used and whether they are proprietary or developed in-house.
  • How asset class assumptions are set and how often they are reviewed – details of process, key individuals, controls, key decision-makers.
  • How views on asset allocation are developed – details of teams, key individuals, processes, controls and key decision-makers.
  • How asset allocation has varied historically, and the reasons for key changes.
  • How asset allocation decisions have varied between fiduciary mandate types.
  • How investment strategies are implemented for individual schemes, including the asset classes/ fund investments that are permitted for investment and the degree of asset allocation flexibility allowed.
  • Extent and type of derivative usage.
  • Details of approach to hedging liabilities, including level of hedging and timing of implementation.
  • Extent to which they use leverage within their hedging and investment strategies.
  • Details of leveraged investments used and limits on leverage applied.
  • Where they believe they can add value, how and why.
  • What they expect to be the main components of performance delivered on schemes and the relative contribution from the main components (such as strategic asset allocation, tactical asset allocation, fund manager selection and currency).
  • Details of expected gross versus expected net portfolio returns.
  • Details of how fees and costs are managed, including how base fees and performance fees are negotiated, and how fee economies of scale are made available to individual schemes.
  • The extent to which they assess and monitor type and scale of risks that the scheme is exposed to, for example funding level volatility, liquidity risk, counterparty risk, etc.
  • Details of how they manage and mitigate portfolio risk and details of the risk metrics that they monitor.
  • Where 'own brand pooled funds' are offered, how these opportunities are assessed and considered for individual portfolios (for example, in relation to alternative or illiquid classes of diversified asset pools).
  • Their views on risk transfer opportunities, eg through an insurance buy-out.
  • Current views on market and asset allocation.
  • Examples of successful / unsuccessful investment decisions made (strategic, tactical etc).

Investment manager resources and selection: To understand how investment managers are selected, the structure of the portfolio and its suitability

  • Resources available.
  • Range of asset classes and investment opportunities covered.
  • Details of research process.
  • Performance history and attribution of performance.
  • How portfolios are constructed.
  • Manager appointments.
  • The level of investment fee and investment transaction costs and how these are managed.

Environmental, social and governance (ESG) considerations, including climate change and stewardship: To understand how these issues are integrated into the firm’s investment approach

  • How ESG, including climate change factors, are considered as part of investment manager appointment, monitoring and portfolio construction.
  • How ESG ratings are established and updated for individual investment managers and strategies.
  • How ESG and climate risk exposures are assessed, including the overall exposure of a scheme’s investment strategy.
  • What information is reported to trustees on ESG and stewardship matters, and how frequently.
  • The process for exercising voting rights, including the extent to which they are exercised, and which party decides how to vote.
  • The process for engagement, including who selects the companies and topics, who undertakes the engagement and how discussions influence investment decisions.

Reporting: To understand how performance will be reported and the quality of those reports

  • Responsibility for reporting.
  • Frequency and content of reporting.
  • Historic investment performance of the provider’s full fiduciary management clients. This is covered in the section on performance.
  • Sample reports.
Fees and costs: To understand how fees and costs are reported, disclosed and managed

See the section on fees and costs.

Terms used in this guidance

Competitive tender process

This is defined in Part 2 of the CMA Order as a process by which trustees, or a person appointed by them to act on their behalf, have invited and used reasonable endeavours to obtain bids for the provision of fiduciary management services from three or more unrelated fiduciary managers and have evaluated the bids received.

Delegation

The transfer of responsibility for the exercise of one or more of the trustees’ powers to a third party. For example, often trustees delegate day-to-day investment decisions to an investment manager but retain overall responsibility for the investment strategy. Pensions law permits delegation of investment decisions to a fund manager on this basis, but trustees should note that they remain liable for defaults or acts of the manager unless they have taken all reasonable steps to satisfy themselves that the manager has the appropriate knowledge and experience and is carrying out their work competently in compliance with relevant legislation.

Fiduciary management services

This term is generally used to describe a governance model through which trustees delegate the day-to-day implementation of their investment strategy to a fiduciary manager.

However, where the term is used in the context of the requirement to run a competitive tender exercise, this is defined in Part 2 of the CMA Order. In addition to day-to-day implementation, the fiduciary management provider (or interconnected body corporate, partnership or joint venture with the provider) also provides advice on one or more of the following:

  • investment strategy
  • investments that may be made, or
  • the services of making investment decisions on behalf of the pension scheme trustees on an ongoing basis in respect of all or some of the scheme’s assets

The reference to ‘advice’ means advice on the merits of the trustees taking or not taking a specific course of action and includes a recommendation or guidance to that effect.

Fiduciary manager

A person or firm that provides fiduciary management services.

Investment consultancy services

This term is generally used to describe the provision of advice to the trustee board to support decisions on matters such as investment strategy, strategic asset allocation and manager selection. However, for the purposes of the legal requirement to set strategic objectives, this is defined in Part 2 the CMA Order as advice to trustees on one or more of the following:

  • Investments that may be made or retained by or on behalf of the pension scheme trustees.
  • Any matters in respect of which the pension scheme trustees are required by law to seek advice in relation to the preparation or revision of the statement of investment principles.
  • Strategic asset allocation.
  • Manager selection.

The CMA explanatory note says this may include advice on investment strategy and/ or on the appointment of a fiduciary manager.

Investment beliefs

An agreed and documented view in respect of investments, based on knowledge, understanding and experience.

Investment consultant

A person or firm that provides investment consultancy services.

Third party evaluators

Individuals or firms who offer a range of services and advice to trustees on running tender processes, selecting and reviewing the performance of advisers and service providers.