Moving to fiduciary management
Malcolm Curzon, chairman of the trustees at the Habitat Pension Scheme writes…
In common with many other defined benefit (DB) pension schemes, the trustees of Habitat’s DB scheme faced a challenging set of problems in 2008.
The company’s DB scheme, which has assets of approximately £25m and around 1,000 members in total, had been closed to new joiners in the 1990s, with a defined contribution plan set up which was better suited to the youthful age profile of most Habitat employees. The DB scheme was later closed to all future accrual as Habitat, like thousands of other companies, sought to control what was becoming an expensive and volatile liability.
Our investment consultant at that time advised the trustees on the fund managers appointed for the five different asset classes used. Each appointment was a time-consuming and costly exercise. We were charged for the review of a manager’s performance, charged for the beauty parade itself and then we were never quite sure if we were making the right decision. As others have pointed out, managers are often appointed at a peak in their performance, meaning their subsequent performance dips and so the cycle of reviews and new manager appointments continues.
We felt that there had to be a better alternative and resolved to find a more dynamic way of working with an investment consultant. At the time we had not heard of fiduciary management but we knew we wanted a more cost-effective and responsive investment approach.
Another factor was whether a fiduciary manager used their own funds, as we felt there was a potential conflict of interest if this was the case. We also wanted to ensure that we could quickly extract ourselves from any arrangement in the future. So we spent time working on a satisfactory legal agreement, conducting due diligence and also on understanding who would be responsible for what and ensuring that the trustee board was comfortable with the proposed change.
So what has changed following Habitat’s decision to appoint a fiduciary manager in 2009? The trustees still set the investment strategy and have the final say on investment matters, while the fiduciary manager is responsible for implementing the asset allocation and the hiring and firing of fund managers when necessary. We also worked together on turning an overall investment strategy, expressed in terms of objectives and risk levels, into an asset allocation framework.
Overall, the change has worked well. Costs are down. We no longer pay separately for investment advice, investment management and custody – this is all covered in fiduciary management fees and we no longer have a separate investment consultant. The fiduciary manager can make manager changes quickly when necessary and fewer in-house pension staff are now needed. Reporting is also much improved, we receive regular, transparent reports and can also monitor this online. In addition, the trustees have more time to focus on strategic issues and can take a more holistic approach to assets and liabilities. By matching assets and liabilities more closely, we have seen our funding level rise to around 85% now, despite difficult market conditions in the last two years.
Habitat was one of the first UK pension funds to appoint a fiduciary manager and since then we have talked to others about this and the concept is now better known in the UK. A common reaction from other schemes is to say they think it is a good idea, but that their trustee board is not ready for it yet. My advice to other schemes is to think about the areas that the trustee board can really add value and then assess the best governance structure for achieving this focus.