Fiduciary management transitions: smoothing the process

When it comes to switching FMs there are added complexities to consider, as outlined below. 

"Trustees should be aware of the potential barriers to leaving an FM when making their initial selection decision."

It is also important to fully understand what you are “buying”, using the competitive tension of a selection exercise to help structure the mandate in a way which suits you as trustees.

1. Are you “locked in” by exit charges?

The extent of any hidden costs will depend on the fund structure and the agreement with the incumbent FM. It is more likely to be an issue for schemes in segregated arrangements or those schemes which were early movers to FM with bespoke agreements in place.

We’ve seen schemes looking to switch FM being hit by “wind-up charges” when trying to leave, even after having been informed there are “no exit costs” during the tender process.

In other cases, there have been performance-related fees which became due at point of exit, with the impact running into the millions of pounds for some schemes.

There may also be the issue of “doubling-up” on FM fees, where the scheme pays both the incumbent and new provider for a period of time. This can be more costly if the transition is delayed; for example, while illiquid assets are sold.

2. Could you face delays when selling assets?

Everyone knows that transferring illiquid assets is difficult, but a seemingly liquid portfolio may take longer to exit than expected too.

While funds may have quarterly or monthly dealing dates, trustees need to be aware there can be trade ‘notification periods’ (in which advance notice is required before a trade date), ‘settlement periods’ (periods of time between the trade date and actually receiving money), and ‘redemption queues’ or ‘gates’ (in which the funds themselves restrict the total amount of disinvestments at a particular time). Each of these extends the timeframes.

You might think this is only relevant for trustees moving to a new FM, but this is particularly important for pension schemes approaching their endgame. If you have spent time refining your investment strategy to be well-positioned to opportunistically transact with an insurer, the last thing you want is be told that you can’t sell your assets quickly or wind up your scheme.

3. Are your objectives being met?

Once an FM provider is notified of a scheme’s decision to leave, they could move that scheme onto what is referred to as a “care and maintenance” basis.

The scope of service and responsibilities differ between providers, but generally it means that no significant strategy work will be undertaken, and certain investment changes will be avoided. We have also seen instances of reduced reporting, meeting attendance and client servicing after schemes move to a care and maintenance basis.

While it may be logical to postpone any changes to the strategy before transitioning, trustees should consider whether they are happy to receive lower levels of client service from their FM.

Trustees should also consider whether the fees they are paying to the provider remain appropriate considering the scope of service they are receiving.

4. What factors are driving the investment strategy?

It is also important that your new provider is thoughtful about the initial investment strategy, post transition.

While the new FM is incentivised to move assets into their solution as quickly as possible, we do not believe they should simply “replicate” the existing strategy or even the initial strategy proposed as part of the selection exercise without conducting further analysis. Replication can result in double the transition costs if refinements are then needed at an early juncture.

The new FM should carefully consider the treatment of any existing illiquid assets or liability driven investment (LDI) portfolios. In both cases it may be more cost effective to retain the existing holdings, or in the case of illiquid assets sell these down over time.

In conclusion

Transferring assets is never an easy job. Transferring the entirety of a pension scheme’s portfolio at once brings a whole host of additional challenges.

This can become even more tricky in a volatile market environment, increasing the importance of pre-planning during the selection process.

While many transitions go ahead as expected, we have seen a number of cases face hidden issues and delays along the way.

Every transition is unique but working with an experienced independent adviser enables trustees to identify obstacles early and navigate these effectively, helping make the ride as painless and efficient as possible.

Our FM transition checklist can support trustees who are thinking about moving to an FM, who are about to re-tender their FM or who are approaching their endgame.

Please contact your Barnett Waddingham consultant, or the author below, if you would like to discuss any of this topic in more detail.