Spread your wings: fiduciary management in DC

The increasing weight of regulation in the defined contribution market is forcing trustees to outsource investment decisions. Sebastian Cheek charts the development of fiduciary management in DC.

“Fiduciary management can be seen as a solution, but you need to work through the problem with the client then work through the solution. Don’t go instantly to the fiduciary solution.”

John Finch

The terms ‘fiduciary management’ and ‘defined contribution (DC)’ were rarely found in the same sentence until recently, but an increasing weight of regulation and responsibility placed on the shoulders of DC trustees is beginning to change that.

In the defined benefit (DB) sector, fiduciary management continues to gather assets as overworked trustees look to offload decision-making to third-party providers. In fact, last year’s KPMG Fiduciary Management Survey found 5% of UK DB schemes were using fully- delegated fiduciary mandates, making up 3.4% of total DB assets.

But the balance is shifting as the burden on DC trustees includes the introduction of auto-enrolment, the charge cap and April’s at-retirement reform, all of which have intensified the pressure to comply with regulation. In April The Pensions Regulator (TPR) introduced requirements on governance standards, charge controls and how the changes are communicated to members, to add to trustees’ in-trays.

As with DB, larger trust-based DC schemes might have the internal resources to meet these regulatory requirements, but smaller schemes are likely to struggle to create good member outcomes, so outsourcing some or all of the investment process makes sense.

DC has always occupied what Aon Hewitt DC partner Sophia Singleton terms “Cinderella status” and until recently, played second fiddle to DB at trustee meetings. These days, however, she adds: “There is more focus on DC and there is so much going on schemes recognise they should be delivering better solutions.”

Like traditional fiduciary, trustees can be involved as little or as much as they choose in the investment process.  The DC spectrum is vast, ranging from trust-based at one end to master trust/group personal pension at the other and in between lay various options for outsourcing, including using diversified growth funds (DGFs), target date funds (TDFs) and full delegation of investment decisions to a third party who will take care of investment strategy.

Each scheme is of course unique, but full delegation tends to involve outsourcing the management of white-labelled funds to a manager who will change asset allocation and select managers, usually within pre-agreed guidelines and objectives. Singleton says the service typically involves trustees taking higher-level decisions such as setting the lifestyle strategy and the consultant managing the underlying asset allocation using “objectives-based building blocks”.

She explains: “Rather than being called an ‘equity fund’, it is called a ‘growth fund’ which is white-labelled with clear objectives and then below that there are specialist funds like Shariah funds members can choose from on a self-select basis, but also that trustees can use as building blocks.”

One of the benefits of fiduciary, according to JLT Employee Benefits Investment Consulting director John Finch, is a fiduciary manager can change the underlying managers and asset mix without writing to each individual member. This is a time consuming and administratively complex necessity with a traditional lifestyle strategy.