Fiduciary management and the General Code of Practice

The Pensions Regulator (TPR) laid its General Code of Practice before parliament in January 2024, amalgamating several existing codes of practice into a single code.

The focus is rightly on strengthening the governance of pensions funds. For many aspects of investment governance, actions are likely to focus on documenting policies and practices which trustee boards are already working to. 

It is for pension schemes using fiduciary management (FM) where we see the code leading to one of the biggest step changes in governance. The code is written in general terms and does not explicitly reference FM, but in our view its interpretation is very clear – many  pension schemes need to be doing more when it comes to overseeing the performance and activity of their fiduciary manager (what we refer to as 'FM oversight' in this blog).

Here we explore the implications for trustee boards and include a list of key points from the code relevant to FM.  

Managing conflicts of interest – the case for FM oversight

As you’d expect, the code makes multiple references to the management of conflicts of interest.  

Where FM is concerned, the area that stands out the most is having a clear understanding of the circumstances where such conflicts may arise.

The obvious conflict – and the generally-accepted-case for FM oversight across the market – is that fiduciary managers are conflicted in reporting on and evaluating their own investment performance. The commonly used analogy is one of 'marking their own homework'. 

But there is a myriad of more nuanced areas where conflicts can arise – where decisions delegated to the manager may be more in the interests of the manager’s business and/or broader client base, than the interests of your individual pension scheme. Classic examples include the seeding of new investments, accessing preferential terms with underlying fund managers and potentially discussions around performance targets and long-term objectives.

Professional independent oversight of your fiduciary manager helps with this through the identification and management of potential conflicts of interest in the management of your scheme’s investments.

Matching your knowledge and understanding with your roles and responsibilities 

Having clarity on roles and responsibilities is the foundation of any robust investment governance model – it stops things falling between the cracks and is good risk management.

For FM, increased delegation means less direct trustee responsibility for decision-making but increased direct responsibility for oversight, due to the higher degree of delegation.  

Oversight is not simply receiving a presentation on performance – it is the ability to understand, challenge and face any issues head on. FM typically involves complex portfolios which change often, meaning an increased need in the governance framework for independent expertise on investment matters and FM markets.

Crucially, it can be just as important to understand the information not being shared by your fiduciary manager. The gilts crisis of 2022 was a prime example of where the presentation of the facts was critical to trustee understanding. A  lack of transparency was prevalent across the market, and without being able to recognise the 'known unknowns' it was very difficult for some trustee boards to truly understand what was going on 'under the bonnet'.

A pension scheme’s approach to both delegating investment decisions and overseeing these decisions should in part be linked to the knowledge and understanding of the trustee board. This can then be supplemented to the appropriate degree by insights and advice provided by specialist advisers, such as Barnett Waddingham.

Monitoring and evaluating investment performance 

The code includes multiple references to pension schemes setting performance objectives and monitoring the performance of service providers against these objectives.

Yet, we estimate that only around a third of pension schemes are formally evaluating the performance of their fiduciary manager. There is a clear disconnect between the guidance in the code and what is happening in practice. 

I have explained above why trustee boards cannot solely rely on quarterly investment performance reporting from their manager for this purpose. Professional oversight addresses this, but how frequently should you seek an independent view?

There is no right answer to this, and the code is not prescriptive, referencing a formal performance assessment of investment managers (which is what a fiduciary manager is) at least every three years.

Proportionality is important and we typically advocate 12-month performance assessments for any scheme using FM. This could be part of an ongoing oversight service with regular adviser input, or a standalone periodic assessment. 

And it’s important to bear the following in mind – a performance assessment may be interpreted as advice on an investment decision to retain or replace your fiduciary manager; it is a legal requirement that the person advising on this investment decision is suitably qualified to do so.

Selecting a fiduciary manager

Hopefully by now most trustee boards using FM are familiar with the regulatory requirements around tendering FM services, following the CMA’s market review in 2019. These requirements aren’t referenced in the first iteration of the code by design, but we would like to see it added in future.

I commented above that deciding to retain or replace a fiduciary manager is an investment decision – so is selecting a manager for the first time.  

When selecting a manager, you are implicitly deciding on the destination and allocation of your pension fund’s assets. For example, your choice of fiduciary manager will determine which LDI manager manages your liability hedging assets. Technically this LDI manager appointment is delegated to your fiduciary manager, but since this is a fait accompli – i.e. you will know in advance who this LDI manager would be – fiduciary manger selection is a decision we strongly believe trustees should be taking advice on.

This is another area where there is a disconnect between the code and what is happening in practice. The numbers are more reassuring than with monitoring – with the large majority of FM tenders being intermediated by specialist advisers nowadays – but it is still a concern that a meaningful proportion of schemes are not taking advice in this area.

In summary

We welcome the long-awaited publication of TPR’s General Code of Practice. While it may not contain anything substantively new from a FM perspective, it does shine a light on some important areas where market practice and best practice are not yet fully aligned.

We are firmly of the view that more pensions schemes should be using a professional expert adviser to oversee the performance and activity of their fiduciary manager(s). We hope this blog will encourage further discussion and progress in this area.