The Competition and Markets Authority (CMA) has published its provisional report into the investment consultancy and fiduciary management markets. Whilst it has stopped short of recommending wholesale structural reforms – recognising that these markets are not highly concentrated and that there are no significant barriers to entry – it has made some proposals to address concerns it has identified, particularly in relation to fiduciary management.

Under a fiduciary management model the manager takes some or all of the investment decisions on behalf of the trustees of a pension scheme. It is a fast-growing market and the CMA estimates that 13% of pension schemes now use it. The advocates of fiduciary management argue that it provides a more efficient model for matching investment strategy with the scheme’s longer term objectives (for example increasing the speed at which changes can be implemented). However, it generally costs more, is more complex and involves handing over significant control.

What were the CMA’s conclusions?

In relation to both investment consultancy and fiduciary management markets, the CMA found there were some issues that weaken competitive pressure. These included low levels of engagement by trustees (particularly for small defined contribution schemes) and that some trustees do not have the skills or time to scrutinise their consultant. These comments have largely been rejected by the industry, with consultants citing very high levels of engagement with and scrutiny from their clients. That is consistent with what we see from our clients – all of the investment consultants and fiduciary managers we deal with are engaged with their clients and actively encourage that engagement. That’s not to say there aren’t problems with trustee engagement elsewhere and our experience (and that of the consultants who have challenged the CMA’s findings) is arguably explained by the fact that it is the trustees of well-governed schemes who engage with their advisers, both legal and investment. But we would question whether the solution to this lies more with helping the trustees of the schemes where engagement is an issue on governance more generally (and taking action in respect of those who don’t want to be helped) rather than this being a problem specific to investment consultancy.

The CMA’s more serious concerns related to the selection of fiduciary mangers. In particular there was concern that many trustees do not shop around when they move to fiduciary management: two-thirds don’t go out to tender. The CMA felt that this gives firms who offer both investment consultancy and fiduciary management an advantage, with half of schemes using the same firm for fiduciary management as they were already using for investment consultancy.

The CMA also highlighted concerns about the availability of information to help trustees select or assess the performance of fiduciary managers.

The CMA’s proposed changes

The changes proposed by the CMA are:

  • the introduction of mandatory tendering when schemes first move to fiduciary management (and for those who have already moved to fiduciary management without a tender, to do so within seven years);
  • firms must be clear when marketing fiduciary management services to existing clients that this is not part of their role as trusted investment manager;
  • new and improved guidance to trustees from the Pensions Regulator on how to purchase these services;
  • better information on fees and quality including requirements for managers to break down fees and the introduction of industry standards on reporting performance;
  • trustees to be required to set their investment consultants strategic objectives and firms must report against these; and
  • bringing most of these services under the regulation of the Financial Conduct Authority so that they are on a footing with the rest of the investment industry.

Industry reaction

These proposals have generally been welcomed by the industry as sensible and proportionate measures to improve outcomes and transparency for pension schemes and their members.

However, some concerns have been raised about proportionality in terms of the costs of any mandatory tendering process, especially for smaller schemes. With a more traditional investment structure trustees rely heavily upon their investment consultants in shortlisting and assessing the relative strengths and weaknesses of fund managers. But who would provide that support in a tender process for fiduciary management where the investment consultant’s firm also provides those services? There has been a growth in the use of specialist procurement advisers, but this would add an additional layer of cost which may be prohibitive for smaller schemes. Another option would be to appoint an independent investment consultant to advise on this process on a standalone basis – again there would be some additional cost, but some advice would have been needed even if the incumbent adviser had been retained for this. The shortlisted firms might also engage more with a process where their competitors are not part of the selection process, improving choice and transparency for trustees.

The CMA has invited comments on its provisional findings and proposals and is expected to issue its final report in early 2019.

This blog post was written by Michael Collins. For further information please contact:

Michael Collins, partner, Pensions

T: 0121 234 0236 

E: Michael.Collins@gateleyplc.com


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.