I recommend Barnett Waddingham’s Fiduciary Management Investment Performance Review – 2022  which can be freely downloaded here

Fiduciary Management (FM) is when trustees hand over the management of scheme assets and liabilities to a third party manager.

It is a great piece of work and tells us much about what actually happened to the assets within our defined benefit pension schemes in 2022.

By extension, since the principle of “hedging” which prevails in DB, is also prevalent in our DC workplace pensions, it explains what has happened to the money saved on people’s own accounts. Workplace pensions employ fiduciary management by structuring defaults (typically in the image of DB schemes). I will deal with the implications for DC in a seperate blog.

So what does the report say?

The principal message is that last year was like no other and that things will look back at it as a “pivot”

2022 was a pivotal year for UK defined benefit pension schemes, with rising yields reducing long-term funding target timeframes for many. This changed the objectives and needs of many trustee boards when looking to implement a fiduciary management framework.

While such a generalisation is valid, the survey looks beyond the general

It is more important than ever to consider scheme-specific analysis of performance, as there was huge variability resulting from the gilt volatility during the autumn of 2022, even within a single fiduciary manager.

The analysis is anonymised , no participating managers are identified in performance charts, the managers who participated are listed. The mandates offered to these fiduciary managers are to achieve various levels of return from assets compared with the increase or decrease in scheme liabilities.

The purple dots represent mandates where the trustees targeted the managers to achieve an aggressive target, the green target was middling and the blue targets were less demanding. The results show that by and large the less aggressive approaches resulted in similar returns and lower deviation from what the  markets used returned, while the more aggressive approaches tended to see  a greater spread of returns and “tracking error”.

But we can see enough outliers to know that some fiduciary managers went very wrong and a handful did very well.

But the vast majority of managers saw liabilities falling but assets falling much faster. This does not suggest that liability driven investment “worked”, indeed it shows that the pick up in scheme funding was down to a change in discount rates, not from there being more money in the schemes to pay pensions.

If you look at what actually happened to assets in pension schemes, the picture looks much worse.

The answer to Barnett Waddingham’s question (whether FMs could provide protection against falls in the markets) was in generality “no”.  Even with a liability target reducing fast , assets did not manage to beat liabilities and this appears to be down to the hedging strategies employed.

And here, my understanding of what a fiduciary manager does, comes unstuck. My layman’s view is that a fiduciary should be able to manage the hedging of liabilities as well as the asset allocation.

With interest rates predicted to rise throughout 2022, why were the hedging strategies maintained broadly in line with previous years? Sure, a few managers cut loose from guidelines and were able to vary the level of hedging on an unconstrained basis, but it looks from the figures above that even the unconstrained mandates employed hedging,

Winners and losers

My perception of fiduciary management was that by giving management of assets and liabilities to experts (at a fee) you were given an expectation that both assets and liabilities would be managed to a target. It seems to my untrained eye, that most fiduciary managers simply failed to take advantage of the massive head start that was given them by liabilities falling, In racing terms, liabilities were carrying several stones overweight but still beat better handicapped assets to the line. 

If you regard 2022 as a five furlong sprint, then liabilities won while carrying overweight

If you regard 2022 as part of a much longer 3 mile race then liabilities beat assets the vast majority of the time

The target boxes (the grey ones) are barely breached .

It would seem to me that over the past five years, fiduciary management – based on practice rather than theory, has failed the vast majority of schemes that have used it.

The only winners appear to be fiduciary managers which adopted, or were allowed to adopt, lower hedging of liabilities

Here you can see most schemes beating targets – even where the targets were high.

This leads Barnett Waddingham to some very simple conclusions – the “notable jump” is from a low dispersion of returns between FMs in 2021.

So 2022 was a pivotal year but most fiduciary mandates are still set to provide protection against interest rate falls. That protection went badly wrong in 2022 and so long as fiduciaries maintain hedging strategies, they will not be taking advantage in the ongoing rise of interest rates happening in 2023.

Hedging strategies in 2022 sometimes went wrong and clearly there were some train crashes among fiduciary managers when hedges were lost involuntarily.  But for the most part, it looks to me as if the fiduciary managers – even when unconstrained by hedging guidelines, herded in 2022, missing one of their great opportunities , because they could not or would not reduce hedging in the first half of the year.

The report concludes that in 2022, fiduciary management didn’t work and by and large it hasn’t worked these past five years. If 2022 was a pivot, it will be interesting to see what change (if any) results.

I have another blog to write on this excellent report, it will come tomorrow and will look at issues of liquidity and of the impact DB thinking has had on DC schemes,