The pervasive progress of “fiduciary management” into DC schemes.


Why Fiduciary Management is important to DC schemes

This blog is part 2 of my thoughts on Barnett Waddingham’s excellent review of investment performance in fiduciary management in 2022. Though this paper does not talk of DC schemes, it has made me think again of the roles of DC Trustees and of the executives of the commercial workplace pensions, as well as the few “not for profit” DC occupational schemes remaining,

Although defined contribution plans no longer require us to buy pensions on a “money purchase” basis, they are still thought of as pension schemes. For the sponsoring employer and trustees , they are pension schemes without the liabilities. Without liabilities, DC schemes are no threat to a corporate’s balance sheet but they still require a sponsoring employer to employ trustees and employ much of the paraphanalia of a DB scheme.

For most employers , the need for trustees is non-existent, they would happily hand over decision making on workplace pensions to commercial entities such as GPPs and master trusts where they can participate but exert little control over the management of their staff’s money.

These relatively new commercial pensions are heavily reliant on   fiduciary management  which offers the combination of both investment advice and outsourcing of the day-to-day management of our pension money. The asset owners – the trustees – are now dominated by the scheme’s executive and their agents. Effectively most decision making taken by commercial workplace pensions is outsourced  to “fiduciary management”.

New governance structures – same old strategies

The fiduciary management of DC schemes is carried out by  actuaries, guided by lawyers and investment advisers who all too often look to  replicate the strategies of defined benefit pensions for which they are trained. Effectively, the management and measurement of DC pensions replicate DB pensions

Performance is measured not for the saver for the scheme and value for money is to be assessed on scheme assets rather than the member’s experience.

When projections are required for statutory money purchase illustrations, they are produced using assumptions transferred across from DB schemes including the assumption that people will still purchase a pension using an annuity,

Finally, and most notoriously, DB has given us the DC lifecycle (AKA lifestyle) where the end of life is the point when people stop saving. This gives rise to an investment strategy designed to reduce the risks of purchasing a pension, which is not what most people do anymore.

Nevertheless , the concept of people in their fifties and sixties , needing to be invested in “low-risk” assets such as long-dated gilts (down 33%) and index-linked gilts (down 36% in a year), has led to poor outcomes amongst savers who have found themselves in default funds designed to protect them from financial vicissitude.

2022 and all that

The chart above shows that 2022 was bad news for DB schemes. But because DC schemes replicate DB strategies, 2022 was equally bad for DC savers, young and old. They may not have had the shock of unwinding geared LDI positions, but they had little or no upside from the collapse in prices of fixed interest securities and had little exposure to growth assets other than in listed equities.

The issues that DC savers had in 2022 came from all elements of the  there was no self haven.default fund’s portfolio – return seeking, cashflow matching, and liability hedging strategies.

But the issues were particularly severe for people at or close to the end of the savings phase of their pension journey. They are now stuck in assets that do not seek to create a return but simply await the taking of cash to line bank accounts , purchase annuities or switch to SIPPs from which money can be drawn down.

Unlike with DB schemes, fiduciaries of DC schemes have no liabilities to manage, but that does not stop the asset management being structured as if there were.

As this chart , presented by Newton at a recent playpen lunch shows, the fiduciary management of our money in default strategies at retirement is focussed on the DB  return seeking, cashflow matching, and liability hedging strategies

“Cashflow matching” is represented by the red bars, where defaults transfer savers money from growth seeking assets to cash in expectation of 25% of the pot being cashed out at retirement. The dark blue bar replicates “liability hedging”, the idea that DC funds need to hedge against interest rates as savers are likely to be buying annuities. The decreasing exposure to return seeking assets (equities) is represented by the black bars. As mentioned above, these fiduciary strategies are based on the underlying concept that DC is a DB pension without the liabilities.

Much of this DB thinking has been transferred across to DC schemes without any challenge. The DC saver is treated as if he or she was in a DB scheme for no good reason other than that is what has always been the case.

The legacy of the DB trustee haunts DC fiduciary management

Herein lies a fundamental problem with trusteeship (a literal translation of the Latin fiduciary). No one has properly defined what DC trusteeship should be about.

Many have tried. In 2013 the Pensions Regulator tried to encompass all responsibilities a trustee has to manage a good scheme in a document entitled “the 31 characteristics of a good DC scheme”. This has now been archived. The concept of DC trusteeship itself is looking an anachronism, a hangover from the days when trustees took decisions on DB schemes and did not outsource these decisions to fiduciary management. Trustees are subject to regulatory guidance which make them TPR’s compliance officers but they are increasingly sidelined when it comes to the management of our money.

Nowadays, the responsibility for how a default is constructed and the assets within the default falls to the funder of a few commercial mastertrusts and the executives of a handful of large DC schemes still taking active investment decisions. For a great number of workplace pensions that use contract based workplace pensions , there are no trustees and the fiduciary management rests with an insurer.

As more and more schemes consolidate, fiduciary management will rest with a small group of CIOs , an even smaller group of specialist investment consultants and with regulators likely to be increasingly interventionalist over issues such as TCFD, VFM and the exposure of assets to acceptable growth strategies.

Trustees are likely to become increasingly irrelevant as commercial master trusts and GPPs look to seek approval of the gatekeepers to new business (the consultants) and the regulators. This is a necessary consequence of moving to a commercial system of pension management – a system that is totally prevalent in DC.

The demise of the not-for-profit governance system

Fiduciary management is the  commercial equivalent of a trustee’s investment committee and it has all but taken over the running of DC schemes. The few DC trustees who remain are typically paid and often not even named, being “corporate trustees” representing their firms.

While we might like to think of trusteeship as a “not-for-profit” activity, in reality, it is now a professional vocation for those who get selected. Professional Trustees are much closer to being compliance officers than investment decision makers. They ensure compliance just as IGCs and GAAs ensure compliance to the instructions of regulators.

The real decision making on investment strategies and their implementation is taken by the funders of the large DC arrangements and most of them are vertically integrated, meaning that they are both executive to the pension scheme and part of the investment organisation that owns the platform or the fund management (or both) of the scheme.

This relatively new dynamic is not universal. There are still strong trustee chairs who will ensure that trustee boards exert their fiduciary control, but such trustees are rare. They should be encouraged as should be truly independent IGC and GAA chairs.

The health of our DC system requires that there is a proper distance between the trustee and the executive and that fiduciary management is subject to the oversight and over rule of powerful and expert trustee boards.

Put another way, without strong trustees who understand DC, we risk a pervasive system of fiduciary management where the needs of the member come second to the scheme.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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