UK’s fiduciary management market slows due to Covid and the CMA

08 November 2021 5 min. read
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Uncertainty in the market and the introduction of new regulation has slowed growth in UK’s fiduciary management industry, according to Isio’s latest ‘Trends in Fiduciary Management’ report. 

The pensions consulting business has been researching the fiduciary management industry annually since 2010 (previously as part of KPMG’s pensions business), finding that a turbulent 12-month period and the Competition and Markets Authority (CMA) Order deadline has added additional pressures on the industry by increasing the level of activity and competition. 

Total assets under management increased by circa 16% over the last year, although these were driven by a small number of very large new partial mandates in the market. Overall, there has been a slight decline in the growth in fully delegated mandates assets under management despite the expectation of an increase due to positive market conditions. 

Growth in Assets under Management

“This might have been counteracted by schemes targeting a lower return and therefore smaller growth in asset size,” explained Paula Champion, Head of Fiduciary Oversight at Isio. 

Impact of the CMA review

The majority of activity was due to the retender of mandates, driven by the June 2021 CMA Order deadline, which led to a small percentage of mandates shifting between managers. Champion suggested that this has taken up "significant time for trustees, fiduciary managers and third-party evaluators" while driving a significant reduction in fiduciary fees for pension schemes that retendered.

Compared to the year previous, the number of retender exercises participated in (i.e. number of fiduciary proposals submitted) by fiduciary managers for fully delegated mandates increased 345% compared to the prior year. 

Retender Exercises + Retender Wins over 2021

Many trustees decided not to switch providers following completion of the exercise, with at least 86% of schemes staying with their incumbent fiduciary managers. The survey does, however, highlight a visible reduction in fiduciary fees from last year.

Most schemes using fiduciary management companies have seen their fiduciary fees reduce, especially those with assets less than £250 million. A scheme with assets of £250 million has seen their ongoing fiduciary fees reduce on average by £25,000 per year, or £250,000 when considered over a 10-year period. 

Champion noted, “It’s clear the retendering process has had a positive impact on the sector, with greater engagement and innovation from fiduciary management, but the number of schemes staying with their incumbent but for a lower fee is perhaps not the outcome the CMA expected back in 2019.” 

Average FM Fee by AUM

She added, “The market volatility caused by the pandemic has arguably encouraged many to stick with the familiar but it’s clear clients have used the process to ensure they are getting better value for money, which can only be a good thing.”

The use of third-party evaluators also experienced material change driven by the CMA Order. In fiduciary management selections the use of third-party evaluators increased from 57% to 79% over the year, and the use of third-party evaluators to monitor fiduciary management mandates increased from 22% to 29%.

“The increase applies to schemes of all sizes and could be driven by positive experience of third-party evaluators during retenders,” said Champion. “The increase in the use of third-party evaluators is a very positive step for better managing risk in pension schemes with fiduciary management.”

Growing focus on ESG

The report further found that ESG continues to be an important driver of change in the market. Pension schemes’ engagement on ESG matters has significantly increased over the year, becoming more bespoke and embedded for schemes of all sizes. Only 1% of fiduciary management clients did not engage on ESG and more clients defined general ESG policies and objectives relative to the year previous. 

How many of your full FM clients take the following actions with respect to ESG and your fiduciary relationship

In the past year, two new ESG requirements came into force this year: The Task Force on Climate-Related Financial Disclosures (TCFD) for Schemes over £1 billion; and the production and publishing of Implementation Statements for most schemes. 

“The way fiduciary managers have responded to the new ESG requirements demonstrates that the market is becoming more accountable, with 86% of fiduciary management clients amending their ESG policy over the last 12 months, compared to 75% in 2020,” said Champion.

According to Isio’s estimates, the UK’s fiduciary market now sits on more than £220 billion in assets under management, arising from more than 700 mandates across the country.