With Due Diligence on Appointing Fiduciary Managers, US Pensions Have Leg Up on UK Counterparts

(May 17, 2011) — Due diligence on appointing fiduciary managers should be a legal obligation for pension funds, UK consultants say.

UK-based Muse Advisory and law firm Wragge & Co have cautioned that trustees could face major conflicts of interest issues if they fail to conduct that required due diligence.

But, according to Debra Woida, leader of discretionary investment services at Towers Watson, US fiduciaries have a leg up on their UK counterparts, as US fiduciaries are already obligated under the Employee Retirement Income Security Act (ERISA) to perform due diligence. While ERISA has been around for 37 years in the US — incenting pension fiduciaries to perform a high level of due diligence before appointing a fiduciary manager — there has recently been a heightened level of emphasis following the global financial crisis. “Today’s movement toward mark-to-market accounting and funding rules and the related impact on corporate financials has fueled more emphasis on fiduciary decisions related to how plan assets are managed and who is responsible for making investment decisions,” Woida told aiCIO.

In the UK, Muse Advisory director Mark Hodgkinson said: “Over the last few years we’ve been surprised to see firms converting their traditional consultancy clients to fiduciary management with seemingly little due diligence on the part of the pension fund trustees.”

Meanwhile, Wragge & Co pension team partner Paul Feathers said in a statement that his firm had advised a variety of clients on awarding fiduciary management mandates. “It is essential for trustees, when appointing a fiduciary manager, to undertake a much higher level of due diligence to discharge their obligations under the Pensions Act 1995. Trustees must ensure that the appointed firm has the right level of knowledge, expertise and experience,” he wrote.

While pensions in the US have historically faced a higher bar when appointing fiduciary managers, UK funds have been slower to embrace the model. According to a recent survey by Pensions Management and Pensions Week, leading managers responded with the following when asked “how do you view fiduciary management?”

• Inappropriate for the trustee model (8%)
• A useful way of dealing with the complexity of fund management (38%)
• Unproven (23%)
• Needs to be investigated further (15%)
• Use in-house investment expertise instead (15%)

The perception of fiduciary management by UK pension managers contrasts with a report last year by one of the country’s biggest pension advisory firms that revealed that time-pressured trustees are unable to spend sufficient time on investment decisions. The study by consultancy firm Aon Hewitt discovered that UK-based pension boards lack investment expertise. Spokesman Colin Mayes told aiCIO that the findings of the research should not be perceived as a criticism, but should instead highlight the intense pressure that pension boards are facing and the need for assets to be put to work more effectively.

“Highlighting the results of our research is not intended as a criticism – but a reality check is needed if assets are to be put to work more effectively,” said Zuhair Mohammed, head of delegated consulting at Aon Hewitt, in the research. He explained that continued economic uncertainty and highly volatile financial markets are stretching the already limited resources of most trustee boards to the extreme. “What is clear from our survey is that the time devoted to investment matters and the level of investment expertise permanently on trustee boards is simply falling short of what is required,” Mohammed stated.