European Pension Schemes Are Increasingly Seeking Assistance From Fiduciary Managers
November 3, 2020 — London
High fees are among the reasons U.K. pension schemes are deciding to retender or switch fiduciary manager
Cerulli Associates’ latest report, European Retirement Industry 2020: Addressing Pensions’ Evolving Needs, shows that the U.K. and the Netherlands are the key markets in Europe for fiduciary management. However, pension schemes throughout the region are considering appointing fiduciary managers with the aim of gaining access to more esoteric asset classes and improving their governance.
Cerulli estimates that U.K. fiduciary assets under management (AUM) stood at £205 billion (US$253 billion) at the end of 2019. Defined benefit (DB) schemes currently make up the largest proportion of the U.K.’s fiduciary assets—more than 72% at the end of last year. However, Cerulli expects defined contribution (DC) schemes’ share of fiduciary assets to experience much stronger growth over the next three to five years. Demand for fiduciary management in the U.K. DC space will be driven primarily by small, trust-based DC schemes.
Dutch pension assets exceeded €1.7 trillion (US$1.9 trillion) in 2019 and approximately 88% of those assets were under fiduciary management. New business opportunities in the Dutch fiduciary market are expected to come largely from manager turnover. Compared to the U.K. and the Netherlands, the Irish fiduciary management market is still relatively small, but market participants expect it to grow. The most recent data shows that around €37 billion of total Irish pension assets were managed on a fiduciary or delegated basis as of 2018.
Cerulli expects portfolio customization to become a key important factor in winning and retaining fiduciary business in the next three to five years. “Pension schemes want to make sure that fiduciary managers can meet their specific investment goals, including integrating environmental, social, and governance factors into their investment portfolios,” says Justina Deveikyte, associate director in Cerulli’s European institutional research team and lead author of the report. “In addition to developing their responsible investment practices, fiduciary managers should consider broadening the range of ancillary services they offer in order to win more business.”
Under rules that came into force in December 2019, trustees in the U.K. must run a competitive tender for any fiduciary mandate worth 20% or more of the scheme’s total assets. For existing mandates worth more than 20% of total assets, trustees must run a beauty parade within five years of the original appointment. If this five-year period has already passed, or will expire in the next two years, the trustees will need to run a competitive tender within the next two years.
“U.K. fiduciary managers have responded by bolstering their fiduciary teams and preparing for what is predicted to be a deluge of new and retendered mandates,” adds Deveikyte. “However, some wonder whether trustees are just going through the motions and will simply rehire their incumbent providers rather than move to new fiduciary managers.
Cerulli’s survey of U.K. DB schemes found that only around 22% of respondents plan to retender their fiduciary mandates within 12 to 24 months and more than half plan to do so only in three years’ time. However, conversations with major search consultants and fiduciary managers in the U.K. suggest that most expect to see around 300 to 400 retenders in the market by June 2021.
Around two-thirds of the U.K. DB schemes Cerulli surveyed said that high fees are their main reason for retendering. They identified poor performance and conflicts of interest as the second- and third-most-important reasons for deciding to retender or to switch fiduciary manager.
Interviews and surveys:
The report’s analysis centers on proprietary research, including more than 80 qualitative interviews with a diverse range of players in all of the seven markets examined in detail (the U.K., the Netherlands, Switzerland, Germany, France, Italy, and Sweden). Interviewees included pension trustees, investment consultants, search consultants, fiduciary managers, and institutional asset managers.
- A total of 19 asset managers completed a European institutional fund manager survey, conducted between June and August 2020. These managers had more than €1.5 trillion of European institutional AUM as of December 2019.
- A total of 192 defined benefit pension schemes across U.K., the Netherlands, Switzerland, Germany, France, Italy, and Sweden completed a European pension fund survey. In addition, Cerulli surveyed 40 U.K. defined contribution schemes. Altogether, these pension funds represent more than €1.6 trillion in assets.
- A total of 29 fiduciary managers operating in the U.K. and Dutch markets, with total European fiduciary AUM of €2.1 trillion, completed a fiduciary manager survey. Overall, 12 respondents operate only in the Dutch market, 12 focus on the U.K. market, and five cover both markets.