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Tender for investment consultancy services

This good practice guide helps trustees apply the principles of tendering when selecting investment advisers.

Introduction

This guidance is for trustees of occupational pension schemes. It will also be of interest to providers of investment consultancy services and employers.

It is good practice to consider running a tender exercise when selecting advisers and service providers. This guidance has been produced in response to a recommendation by the Competition and Markets Authority’s (CMA) in its Investment Consultancy Market Investigation final report to produce guidance on how the competitive tender process can be applied to the selection of providers of investment consultancy services.

This guidance will provide you with practical information and key matters to consider when putting together a competitive tender exercise.

Appointing an investment consultancy provider

When an investment consultant is appointed in an advisory-only role, the strategic investment decisions are taken by the trustees following advice from the investment consultant. The day-to-day investment decisions (such as which individual investments to hold) are delegated to the investment managers, who have been appointed by the trustees following advice received from their investment consultant.

There can be variations of this governance model and in some cases investment consultancies will offer their clients a hybrid service, whereby they will undertake a very limited range of actions once certain pre-determined triggers are met. Similarly, for some schemes, existing investment managers will agree to undertake certain investment and risk management actions within clearly defined parameters set by the trustees in advance, once certain triggers and thresholds are met.

When you are considering appointing a provider of investment consultancy services, it is good practice to consider running a tender exercise before making the appointment, as with any other provider of services to the scheme. A competitive tender exercise will help you identify the adviser that best matches your scheme’s objectives and your requirements for the service. It may also help you put in place a more favourable fee structure for services you receive.

Some trustees may choose to appoint different consultants with particular expertise to provide advice and support in relation to specific aspects of their scheme. Some trustees may also use the selection exercise to create a panel of consultants they can draw from when they need specific advice and support. The good practice set out in this guidance can be applied where you choose to select one or more consultants.

Key considerations when tendering for investment consultancy

Understanding your governance capabilities

The requirements you will have for your investment consultancy service provider will vary depending on your scheme governance structure and capabilities. Before preparing a tender for an investment consultancy provider, it is good practice to consider:

  • the level and extent of investment expertise available to your trustee board through the board membership, the investment sub-committee and any in-house or executive team, and
  • the time available to perform your investment duties

If your current scheme governance structure and circumstances give rise to concerns, you should consider whether changes are necessary. This could include the following:

  • Appointing a professional trustee (or an additional professional trustee) with specific skills and experience in relation to investment.
  • Creating an investment sub-committee.
  • Reviewing the extent of delegated authority provided to the investment sub-committee to enable decisions to be made and implemented.
  • Expanding your board and sub-committee roles, for example by increasing the membership or increasing the time commitment needed to perform those duties.
  • Simplifying the existing investment arrangements to align better with your governance capability where the simplified arrangements would still enable you to achieve your overall objective for the scheme.

Where you are concerned that you may not have the necessary investment expertise or governance capabilities within the board, you may wish to consider delegating those activities to optimise investment outcomes.

Your investment beliefs

As a trustee board, you should establish a set of core investment beliefs as these can help focus and improve the effectiveness of your investment decision-making.

These beliefs can also help you set more appropriate objectives for the selection and appointment of your service providers and help you identify the most appropriate investment governance model for your scheme and trustee board.

If, as a board, you do not understand or have enough experience to agree your investment beliefs, you should seek advice from your existing service providers and/or consider appointing an independent third party adviser with specific investment experience who will be able to assist you.

Your scheme objectives

As a trustee board, you should also establish a set of core funding and investment objectives for your scheme, as these will influence which governance model will be most appropriate for your scheme and support the development of your selection criteria for any tender exercise.

After appointing your new investment adviser, you should review and further develop your beliefs and objectives with them. Any objectives you set to monitor the performance of the appointed adviser should support the achievement of outcomes required to meet the scheme objectives. See our guidance setting objectives for providers of investment consultancy providers for more information about this.

To find out more about investment beliefs and objectives, see our DB investment guidance and DC guide to investment governance.

Conflicts of interest

When you appoint an investment consultant, you should be aware of the potential for a wide range of conflicts of interest to arise. The nature of and scale of the conflicts may vary and may depend in part on the breadth of services that the firm the consultant works for is capable of providing. Some examples are as follows:

  • Some providers of investment consultancy services may be linked with a firm offering asset management services, fiduciary management services or both, or may offer such services within their group.
  • Some providers of investment consultancy services may offer access to certain composite funds which they construct and have a commercial interest in, for example pooled funds focused on alternative or illiquid asset classes, or pooled funds offering access to diversified investment pools. In these instances, there may be potential conflicts between recommending these funds over external funds.
  • Like all businesses, providers typically have a commercial interest in the relationship continuing. This could impact their advice, and they may not recommend some risk transfer opportunities (for example, insurance buy-ins) or investment governance solutions (for example, fiduciary management).
  • Fee structures and, in particular, certain performance-related fee structures, may have unintended consequences, such as encouraging the consultant to take higher risks to achieve greater returns.
  • Some investment consultants may suggest the design of the objectives and performance assessment templates that you measure them against. It is important for trustees to understand it is their responsibility to set appropriate objectives and they should identify and challenge if they believe proposed objectives are favourably structured or if the performance hurdles are set too low.

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. You should also understand how investment consultants record and manage conflicts of interest.

Further examples of the potential conflicts that can exist in tender exercises are found in Appendix A: Examples of third party evaluators. Further information about managing conflicts of interest can be found in our conflicts of interest guidance.

Key principles of a competitive tender process

When selecting any adviser or service provider, you should consider running a competitive tender exercise to ensure you obtain an appropriate service that best meets the needs of your scheme and delivers value for money. When designing a tender exercise, it is good practice to consider the following key principles set out below. In applying the principles, trustees should consider the circumstance of their scheme and take a proportionate approach to applying these principles 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 in 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 assessment criteria. See our example topics to consider as part of an investment consultancy services tender for further information.

  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 to their preferred provider(s) 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 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 may be points in the process where involvement of the full trustee board is offered or may be required, particularly where a significant decision needs to be made. For example, an opportunity to attend the final presentations may be offered to all the trustees or an opportunity to meet the “preferred adviser” before the appointment is ratified.

Investment consultancy tender example

Below is an illustrative example of how these principles can be applied to a tender exercise for an investment consultant. When looking to apply these principles to your own tender exercise you should adjust these, so they are bespoke to your scheme requirements. For example, the criteria you select to evaluate bids may be different and the trustees may feel that they have the skills and resources to run the competitive tender exercise without any assistance (eg without the services of an external third party).

Scheme background

The trustees of the XYZ pension scheme had retained ABC Investment Consultants as their investment advisers for many years and had also retained, for a significant period, their scheme actuary, administrator, lawyer and covenant adviser.

The XYZ pension scheme was a DB/DC hybrid pension scheme comprised of the following:

  • A closed and rapidly maturing DB section, which was 80% funded on a technical provisions basis and 60% funded on a buy-out basis.
  • The scheme investments were invested across a range of mainly traditional asset classes, equities, bonds and property, with some alternatives and some leveraged liability driven investment (LDI) which hedged 50% of the liabilities’ interest and inflation rate exposures.
  • An open and rapidly growing DC section, including a default arrangement using a combination of passive funds and a range of six actively managed funds that members could self-select.

An experienced independent trustee was recently appointed as chair of trustees following a selection process. The new chair was committed to reviewing the services provided by all the scheme’s current advisers and believed the investment adviser role should be the first to be reviewed and, if relevant, re-tendered.

Reviewing investment governance capability

Following a short period of review, the new chair acknowledged that the individual trustee board members had a significant range of relevant skills but was concerned that the composition of the scheme’s sub-committees was sub-optimal and although the main trustee board functioned, its performance could also be improved. Consequently, the chair, with the support and funding from the employer, engaged an independent third party, PQR, to:

  • review the existing scheme governance, including the roles and responsibilities, how the trustee board and individual sub-committees functioned, how decisions were made and how the trustee board and sub-committee membership might evolve in the future
  • help them, in conjunction with a workshop organised by their existing investment consultant, to:
    • clearly define their investment beliefs
    • scope out and define their objectives for the scheme over different time horizons (which involved their scheme employer’s participation for some of the time), and
    • review the extent certain responsibilities are delegated to different sub-committees and service providers

Following the initial review and receipt of a report from PQR, the trustees (with the support of the employer) agreed to revise the structure and terms of reference of their sub- committees and to re-tender for their investment consultancy services. The trustees then asked PQR to run the tender process for them and agreed that their current investment adviser should also be invited to tender.

The trustees were comfortable using PQR as they believed they had the skills, resources and experience necessary to assist them with an investment consultant selection exercise. They had also provided evidence (and references) for a number of previous investment consultancy tenders they had run for DB and DC schemes.

Preparing the specification

Based on the work PQR had previously done with the trustees, they put together a high- level specification for the selection exercise which captured the trustees’ beliefs and general requirements for the appointment. This included the following:

  • Active management and investment in illiquid and alternative investments could add value, if the manager selection (and, where relevant tactical asset class rotation) was done by individuals with the expertise, skills and resources necessary to be able to effect and implement decisions on a timely basis.
  • Investing responsibly and engaging as long-term investors reduces risk over time and may impact scheme returns positively.
  • Unrewarded risks should be hedged, diversified or transferred over the medium to longer-term as the funding level in the DB scheme is expected to recover.
  • The investment consultant, working with the scheme actuary, 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.
  • Understanding members’ circumstances and characteristics was important to maintain an appropriate investment strategy within the DC section.
  • The range of investment options offered should allow for different DC member needs (cash, income and annuity).
  • The DC scheme’s default arrangement should generate returns significantly above inflation while members were a long way from retirement and switch gradually into lower risk investments as members neared retirement.
  • The DC investment arrangements offered to members should provide value for members and help deliver good member outcomes over the long-term.

Deciding who to invite to tender

Using this specification, PQR mapped the trustees’ high-level requirements against the full range of providers of investment consultancy services available in the market place. This also allowed for some additional features such as the impact of the scheme scale and allowing for their market knowledge relating to high-level business issues (scale of firm, loss of staff, loss of mandates, quality of investment advice and research etc). PQR then produced a brief report setting out a longlist of eight potential investment consultancy firms, who they knew would be prepared to tender, with a brief outline of each of the firms.

PQR discussed their report with the trustees and the differences and similarities between the eight investment consultancy firms on the longlist. They also outlined, at a high level, some of the key strengths and weaknesses of each of the potential providers. Following discussion, the trustees agreed to invite five of the investment consultancy firms to formally tender.

The tender process

As PQR had extensive knowledge of the investment consultancy market, they were able to rely on their existing research and ratings of investment consultancy firms to provide some of the inputs into the trustee briefing papers. To supplement this information, they prepared a brief invitation to tender which set out the following:

  • The scheme background and the trustees’ reasons 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 trustees (to enable an introductory conversation).
  • The PQR contact details for specific queries relating to the tender submission.

They also included a series of questions within the invitation to tender, for example a request to provide details of the following:

  • Their firm, their areas of expertise and relevant experience of similar DB, DC and hybrid arrangements.
  • The individuals who would be directly responsible for their scheme.
  • How they propose to interact with the trustees, frequency of meetings, level of training.
  • Their ability to successfully identify, select and implement investment opportunities, together with supporting evidence.
  • The investment and risk monitoring reports they would produce for the trustees.
  • Their views on the current DB and DC investment arrangements and how they might be modified or developed to enable an improved outcome to be delivered.
  • The range of analytic techniques, individual modelling tools, communication and behavioural strategies they used to support member engagement and identification of member needs for DC schemes.
  • Their proposed fee structure (including any performance fee structures) and level of fees and expenses they would expect to apply to the fund. To enable the trustees to compare fees on a consistent basis, the firms were asked to provide a breakdown of their fees against a schedule of the services that the trustees expected to be delivered.
  • Trustees of a number of other DB, DC and hybrid schemes they worked with, that would be prepared to provide references.

The five investment consultancy firms were given four weeks to respond to the invitation to tender and five responses were received.

Reviewing bids and making a decision

PQR assessed and graded the individual submissions between 1 and 5 (1 = poor, 5 = excellent) against a weighted scorecard agreed with the trustees. The scorecard was broadly based on the following in Table 1 below:

Please note that 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.

Trustees should consider their objectives in appointing an investment consultant to their scheme and develop an appropriate scoring system based on their requirements and with weightings applied that are appropriate for their scheme. In Appendix A, we have given some examples of the topics trustees could give consideration to when designing an invitation to tender and deciding on their criteria for scoring and selecting a provider for their scheme.

Table 1: 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%  
DC capability 10%  
Proposed interaction 10%  
Manager selection/asset allocation 10%  
Monitoring reports 10%  
Investment/strategic views 30%  
Fees, implementation, references 10%  
Total 100%

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

The trustees had a good understanding of investment consultancy and the range of services offered, and decided to invite two investment consultancy firms to present to them.

PQR invited the two shortlisted consultants to present to the trustees and requested that, as part of their presentation, they include their preliminary recommendations for the scheme’s future investment strategy and set out how they would propose to implement that strategy. PQR provided the consultants with a more detailed brief on the scheme’s current investment, funding, risk management and governance arrangements in advance of the presentations to enable them to better align their preliminary recommendations with the scheme. The agenda allowed time for each consultant to present and for the trustees to ask questions, followed by time for the trustees to review and assess after each presentation.

Following the presentations, the trustees identified their potentially preferred provider but felt that, given the scale of their scheme, they might not get the level of support and service that a larger scheme or a flagship scheme might get. They asked their preferred provider to confirm in writing the team that would be responsible for dealing with the trustees on an ongoing basis and to provide a copy of their proposed service agreement, including the terms and conditions.

Following review and advice being received from their scheme lawyer and PQR, the trustees agreed to appoint their preferred provider, after negotiation of aspects of the fees proposed and the terms and conditions offered. The trustees, following advice from PQR, decided that in this instance it was not necessary for them to complete a site visit to the office of their preferred provider before their appointment. PQR then prepared a brief document setting out the process the trustees had gone through, which set out the key decisions and the main reasons why those decisions were taken.

Appendix A: Example topics to consider as part of an investment consultant 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 investment consulting

  • Basic organisational details, eg registered address, contact details, type of organisation.
  • Company background.
  • Ownership structure.
  • Experience of providing investment consulting 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 team(s) are structured and what resources are available 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 similar nature.
  • Pension scheme investment consultancy 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 manager resources and selection: To understand how investment managers are researched

  • Resources available - scale of team and level of full time resource versus part time.
  • Commitment to research.
  • Range of asset classes and investment opportunities covered.
  • Details of research process.
  • Performance history and attribution of performance.
  • How portfolios are constructed.
  • How ESG including climate change factors are considered as part of investment manager selection and investment manager ratings.
  • Where 'own brand pooled funds' are offered (for example, in relation to alternative or illiquid classes of diversified asset pools) how these are designed and constructed and how portfolio changes are made.

Investment approach: To understand how the consultant’s attitude to investment and risk management 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 team, key individuals, process, controls and key decision-makers.
  • The extent to which 'house views' control the investment advice delivered.
  • How investment strategies are set for schemes.
  • Where do they believe they can 'add value', how and why.
  • How they manage risk.
  • Investment capability - market coverage, market specialism ability to advise on more complex or specialist strategies.
  • Where 'own brand pooled funds' are offered (for example, in relation to alternative or illiquid classes of diversified asset pools) - how these opportunities are assessed and considered for client portfolios.
  • 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.

DC Investments: To understand the consultants capability in relation to DC investment arrangements

  • Experience of DC investments and scheme structures (occupational pension schemes, master trusts, group personal pensions, platform-based, etc).
  • Ability to advise on the selection of providers, investment managers, investment platforms and suitable fund ranges.
  • Details of types of DC investment strategies (accumulation and decumulation) developed and implemented.
  • Design of default investment strategies.
  • View on and approach to provision of access to self-select funds.
  • Monitoring of providers, platforms, investment managers and investment outcomes.
  • Monitoring of expected member outcomes.
  • Approach to design of member benefit withdrawal options including drawdown solutions etc.
  • Ability to support on member engagement, member education and communications.
  • Ability to support on analysis of investment fees and costs and on the assessment of value for members.

Reporting: To understand how investment 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 investment clients.
  • Sample reports.

Fees and costs: To understand how fees and costs are reported, disclosed and managed

  • Fee basis - allocation between time cost and fixed fee.
  • Details of any performance related fee structures, including details of design and details of any asymmetric payoffs.
  • How costs are managed - eg pre-agreed fee budgets with outturn monitored against budget.
  • Authorisation level for time costs work (eg estimated fees above specified level to be authorised in advance).
  • Treatment of material special projects (potential for separate tender).
  • Billing basis - including frequency and level of detail provided.