I outsourced my pension fund to a Fiduciary Manager (but didn’t know it)

In 1670, Moliere wrote a play called Le Bourgeois Gentilhomme in which the gentleman in question makes a startling discovery;

MONSIEUR JOURDAIN: Is there nothing other than prose or poetry?

MAÎTRE DE PHILOSOPHIE: No, Monsieur: all that isn’t prose is poetry; and all that isn’t poetry is prose.

MONSIEUR JOURDAIN: My God! So for more than forty years I’ve been speaking prose without knowing it … I’m the most grateful man in the world for your telling me that!

I made a similar discovery at the Redington/Cardano bunfight. I’d outsourced my personal pension fund to a Fiduciary Manager. So had all my colleagues, so had 90% of the 14,000 personal pension holders who are my clients and so had the trustees and sponsors of all the Schemes I’d been involved in at Zurich and Eagle Star.

My God! So for 25 years I’ve been selling Fiduciary Management (as Lifestyle) without knowiing it! I’m so grateful for Robert and Kerrin for telling me that.

Now Robert says that you can’t compare DB Fiduciary Managment with DC Fiduciary Managment because the “underfunding car crash involving an insolvent parent doesn’t exist in contract DC”, to which I will respond “it’s the same for you if you die in the back seat or while driving the car”. Robert (Gardner)’s a banker and I’m a retail pension salesman (turned bad). Robert sees things in bigger pictures.

The difference for Robert is one of degree, the financial implications of screwing up as a Fiduciary Manager of a £5bn DB plan are much greater than for a £50k DC plan but the principal is exactly the same and if the outcome for the member of the car-crash is that he can’t pay his gas bill when he’s 70, it’s no different at all.

Let’s look at what both Redington and Cardano are trying to do. They are looking to manage out the risks pension funds are taking through 1) sound strategic asset allocation, 2) dynamic tactical asset allocation;- with a view to getting the scheme in shape for buy out in a certain number of years time.

Let’s look at what Lifesytle is trying to do. It establishes 1)a sound strategic asset allocation,2) dynamic tactical asset allocation with a view to getting the plan in shape for buy-out in a certain number of years time.

The only difference between the Implemented Consulting (Redington) view and the Fiduciary Management (Cardano view), is over who has control of the triggers. Redington’s argument is that the trustees should retain control of the triggers and have influence on the providers of the strategies, Cardano’s is that they shouldn’t.

So I ask myself why the trustees of DC plans and the sponsors of worksite personal pensions were (and are) prepared to adopt Lifestyle Strategies which put them firmly in the Cardano camp.

I’ve been at a lot of meetings where these decisions have been discussed and taken and so I’ll rely on my own experience for the answer (though I’m keen to hear from any trustee or sponsor about their experience as I’m prepared to modify this view).

My experience is that trustees looked at the immensity of the task of the task of implimenting pre-retirment strategies thataligned individual member assets to individual member liabilities (annuity and cash) and backed off. It was impossible for them to manage the process for so many individuals. Initially they hoped that they could encourage their members to become their own CIOs so that members , taking advantage of on-line functionality could align assets on a “self-service” basis. Early unit-linked AVC plans, even where in-house annuity rates were not used, did not lifestyle.

But when the trustees looked at what members were doing (surprise surprise- nothing) they took decisive action and lifestyled their default options. This practice quickly became the norm and is now employed by almost all DC plans, whether AVC, main scheme occupational or contract based.

This is the killer argument for Fiduciary Management. Fiduciary Managment becomes an imperative at the point where the trustees cannot realistically hope to exercise the proper degree of control on the dynamic tactical asset allocation of their funds. This assumes that the trustees have recognised that a “set and hold” strategy is not good enough to return their scheme to full funding.

DC Schemes start with low governance expectations. DC managers look for what is possible and exercise control where they can but they do not strive for perfection- they are necessarily pragmatic.

DB schemes start with high governance expectations and trustees aspire to perfect knowledge. In the past they were able to kid themselves by concentrating on the soft issues- manager selection, benefit design etc. Now that the going has got tougher, they have had to focus on strategic and tactical asset allocation focussed on a deeper understanding of their liabilities.

Most trustees find this new focus very hard. They realise that their shceme funding is so threatened that they need to move onto a war footing. However they are already fighting a war on another front. They are dug in on the Western Front trying to save their company. Now they discover the war has spread to a new front- the Eastern Front and if they are to deploy their personal resources to that part of the war they risk being overrun on the Western Front- yikes! Not suprisingly, they have to stick to the day job because that is what they are being paid to do. They know jolly well that if they can’t protect their Eastern Front they risk being overrun from behind- which is exactly what is happening to a lot of companies as a result of their DB pension plan defecits.

Now the way that we won two world wars was not to try to fight both Fronts but to get allies to fight one front for us while we concentrated on our day job. That is precisely what Fiduciary Managment can do for the Trustees of small DB pension plans.

The difficulty for Trustees is not in taking the decision to use Fiduciary Management but in finding “allies”, Frankly we are at 1915 and it wasn’t till 1917 tha the Americans wre ready and willing to enter the fray. For “Americans” read “Consultants turning into implimented consultants and Fiduciary Managers”. They know they must enter the fray but they’re still in boot camp-Sandhurst or whatever. I suspect that they’ll take a little time to acclimatise to trench warfare even when they get to the battleline so the picture for the current generals (sorry trustees) is still pretty dire.

I have no doubt that we would have preferred to have won both world wars on our own but that wasn’t going to happen. Without our allies there would now be a cast of Adolf Hitler on top on Nelson’s column.

What’s really strange is that the crack trooops- the insurers, who know all about Fiduciary Management through lifestyling, have not turned their energies to DB. What is neeed is the skills they have to employed establishing simple means in which pre-determined tactical asset allocation programs can be deployed by trustees (and their advisors) leaving the trustees to get on with their day jobs.

THIS IS NOT HARD. THIS IS NOT ROCKET SCIENCE! 90% of what Cardano are doing with assets can be done using pooled funds. Life platforms can be very effecient, can offer high quality administration and can be the natural answer to the needs of the trustees who can’t (afford the full monty).

In my call to the DC insurers to get their act together I am not trying to out-muscle Redington or Cardano. We need thier Intellectual Property to raise our game. Indeed without them small scheme Fiduciary Management (or contract-based DB managment as I prefer to call it) will not get much beyond the (un)sophistication of Lifestyle.

So how are small trustees going to get hold of Fiduciary Managers with high level IP inside? There is no shop selling the stuff! Queue Dawid to slap on his Ziggy Stardust slap and sing “On no love- you’re not alone!”. The natural place for trustees to shop for this stuff will be the new on-line shopping mall for hard to get but easy to use stuff called www.mallowstreet.com.

Mallowstreet is not just the place for trustees to find Fiduciary Management, it’s where Fiducary Managers can find IP and the advisers to help them apply that IP so their management can be worthwhile. This is how small schemes can benefit from the osmosis from large DB scheme best practice.

Alternatively, managers and trustees of struggling DB plans can call me on 07785 377768 .

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in EU Solvency II, Fiduciary Management, Liability Driven Investment, redington, Retirement, Treasury and tagged , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

3 Responses to I outsourced my pension fund to a Fiduciary Manager (but didn’t know it)

  1. Elliot Varnell says:

    Hello Henry

    Many thanks for this very interesting explanation, especially as I just asked Rob yesterday for a link to explain where he and Kerrin differ,

    I wanted to canvas your views on a couple of points.

    Firstly, I wondered if, in your experience, Fiduciary Management is trying to offer umlimited upside to their clients while giving downside guarantees. In particulalr I wondered if Lifestyle management has been manufacturing options through dynamic hedging, and if not whether you believe this is likely?

    Secondly, you mentioned the insurers stepping in. I wanted to ask what awareness is with the Pension Industry of the challenges that Solvency II is posing to the annuity buyout market? Solvency II is set to provide a strong degree of protection to policyholders, which in the face of it is laudible. However this will be at a cost, and that cost is likely to be borne by people buying annuities in the future through higher premiums. If annuitiy costs were to rise, say 20-30% just because of higher capital requirements, notwithstanding any mortality improvements or lower interest rates – do you think that buyout will be only become affordable for the very best funded pension schemes?

    Many Thanks


    • henry tapper says:


      With all the usual caveats, I would agree that the current intent of a Fiduciary Serviceis to limit the downside risk without handicapping the opportunities to return to full funding (as currently almost every DB scheme is in defecit).

      The longer term strategy is to prepare a scheme for buy-out- or at least an orderly run-off.

      Which leads into your second point , which is the impact of Solvency II. I hope that we won’t be looking back in five years time to the halycon days of 2009 when annuity rates were fine and dandy. I blogged a couple of days ago http://wp.me/ppXQz-2T on this.

      It will be interesting to see whether the Solutions providers can develop products for the smaller end of the DB market that can swap out longevity risk and allow trustees to run off their schemes in an orderly fashion.

      I am really not very well placed to comment more on this as my experience is pretty limited. Issues like this should be getting more airtime and we’ve got to find a forum where trustees of both DB and DC plans can think these things through with real experts (like you!)

      Once again, I point to mallowstreet as such a forum.

  2. Pingback: uberVU - social comments

Leave a Reply