I’d trust a “contract” but not a “Fiduciary”

I’ve spent the week thinking about the various shades of investment outsourcing and am now pretty clear in my head that large scheme trustees have a range of options ranging from the high-scope limited hands-on help of traditional consulting, to the low-scope hands-on approach of multi-managers.

One or two organisations (Cardano for one) provide high-scope and a high level of hands- on management while the implimeted consulting approach (Redington) offers high-scope and the framework for trustees to take decisions quickly enough not to need the Cardano approach.

I’ve established in my head that the Cardano and Redington approach aim to get trustees to the same place (buy out or orderly run-off) and differ only in the degree of control remaining with the trustees.

It is clear that the lower the resource that trustees can comitt to their schemes, the greater the need to outsource. It is also clear that there is a gap in the market for lower-scope services with a high level of implimentation (Cardano lite or Redington lite). Put more simply “affordable implimented consulting, affordable Fiduciary Management”.

The functionaing model to fill this gap exists but is currently being employed in DC and not DB plans (Lifestyle) . The barrier to entry for insurers offering lifestyle strategies is not high and those with the flexibility and agility to adapt their platforms (and thinking) to provide mechanical solutions for smaller DB plans will do well.

Fund Solutions providers now offer a range of products that can allow smaller scheme trustees access to 90% solutions at 50% of the cost of the full scope providers. It’s only a matter of time before Fiduciary Managment services emerge that offer the small DB scheme the opportunity to take not just interest and inflation risk off the table – but longevity risk too.

Small schemes already have access to a much wider range of diversifiers than ever before and we can expect to see greater uptake of diversified growth strategies that really do produce equity like returns without the volatility (rather than New Balanced).

Which is all well and good. the supply side is taking shape.

I’m not so sure that the uptake of either implimented consulting or Fiduciary Management will keep up with the pace of supply side development. A movement towards greater outsourcing requires a different kind of trustee governance (2.0 rather than 1.0 to borrow from Redington). Although the need for change is obvious (just look at funding level graphs over the past five years), these ideas are not in the “trustee domain”. Indeed Redington would argue that there is no domain for trustee debate (which is why they are creating one-www.mallowstreet.com). Forums like Mallowstreet willl be necessary to accelerate the pace of change.

It is very important, if the trustees are going to “get it”, that we articulate ideas in the right way.

The terminology we use “fiduciary, instituional, custody” is not a language that prevails among lay trustees- it is the language of the legal and financial communities. “Fiduciary” in particular is a bad word, as an adjective it denotes “trust and confidence” but intimidates and alienates everyday people- too many vowells, too many syllables and not enough Anglo Saxon gutterality! It says “difficult, opaque and self-absorbed”.

Which is why I’m finding myself talking about “contract based services” when discussing the programs my company can put in place for managing out the risks faced by DB plans. A contract can be as simple as the switching process of a Lifestyle Program or as complex as the rules governing the timing and incidence of Swaps programs designed to reduce the impact of intrest rate, inflation and longevity fluctuations on liabilities. Clarity on the processes that will be employed to take out volatility in growth assets can also be part of such a contract.

Why Lifestyle has become so prevalent as a DC Fiduciary Managemnet approach is because it is easy to us, easy to underand and easy to explain.

This is where thinking, product development, trustee education and delivery needs to be focussed.

My conclusion is that we need rules and that those rules need to be packaged into contracts between service providers and trustees which allow both sides to understand what their obligations are, what metrics will be employed to judge performance and the tolerances that service providers can be given in carrying out their duties.

I am sure that these contracts exist at the Cardano/Redington end of the market, but they certainly don’t in the part of the market to whom I talk. Here there is confusion about terminology, scope of service, scope of implimentation and expectations as to ongoing delivery.

The challenge, if we are to see the purchasers of these services take prudent and timely decisions, is to nail these issues. That means a much greater deal of alignement between actuaries, investment consultants and platform providers and a focus on getting the message across in a way that neither intimidates or confuses the [people we are trying to help.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to I’d trust a “contract” but not a “Fiduciary”

  1. Nick Spencer says:

    Some fair points, Henry although I feel a debate on the semantics is likely to increase rather than decrease confusion. In any case, the sucessful providers will be the ones that can articulate themselves to be best understood. Adam Smith and Charles Darwin take care of most the rest.

    However, my more specific point is the difference between a contract system and fiduciary/advisory one – and that a contract system CAN NOT currently manage the aggregate needs of most pension funds and specifically not during the transition to more robust investment implementations. This is not a fault of the contract but a reflection of the situtuation of the majority of funds.

    Here’s why I think this is the case :

    Consider a 80% funded scheme with 20% VAR (unrewarded) risk from duration and inflation. Not atypical.

    Almost certainly this is too much unrewarded risk for the scheme. Yet the Trustees are likely to face regret risk is they immediately close out a risk that 1 year later could have seen the scheme back to full funding.

    It is simply not possible to create a robust approach – based on adding incremental value across a broad array of difference sources, that could offset the impact from the management of this risk. And so no contract, on the basis of value added can be reached.

    The reality is the need to develop a systematic approach, over many months and probably years, to manage down the risk – taking both investment conditions but also ongoing and evolving client biases and concerns into account. By this means, a fiduciary or advisory approach is required, sharing responsibly for the transition of approach. Potentially arriving at a more robust and coherent risk structure under which a contractual management of the risks could be achieved if desired ( or maintained under the perview of the Trustees if they preferred.)

  2. henry tapper says:


    Good comment. I didn’t make myself clear.

    any de-risking strategy needs to be dynamic and “set and go” is not dynamic. The contract I’m referring to is one that enables tactical asset allocation, the iming and incidence of which can be both mechanic and (to a limit discretionary) For instance you may determine to wap out risk when a key economic trigger is reached (real ILG gilt yields exceeding xbps etc), the level of spophistication of these triggers neeed to be determined by trustee knoledge and understanding, adviser competence and the capacity of the Fiduciary Process to execute within certain risk parametres.

    Nobody’s guaranteeing a return to full funding but , for trustees of little resource, a mechanistic approach may be the least bad option.

    • Nick Spencer says:

      For schemes with less maturity, stronger sponsors or with other mitigating factors this may be possible.

      Unfortunately, I feel that for majority the magnitude of the problem will outstrip the ability to abdicate through a mechanical approach.

      – which Trustees can sign off on mechanism which may start with an 80% decifit but if the risk program runs against them can lock it in at 65% within the next year?

      – which Trustees or Sponsors are comfortable locking in a 80% decifit today, knowing that the end of quantitive easing may result in a rebound that might eliminate the decifit over the next year ?

      • henry tapper says:

        Well there is no magic potion that can cure acute defecits but I wouldn’t underestimate the capacity of solutions providers and advisers to create an auto-pilot that avoids the problems you mention!

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