Perspectives (P): Please explain, as simply as possible, what fiduciary management is.
AW: Pension funds are established to facilitate and organise investment and pay-out of the retirement funds contributed by employer and employees. In the past decade, pension funds had to cope not only with the sometimes conflicting interests of the employees, pensioners and corporate sponsor, but regulators have become increasingly involved. Meanwhile, the economic environment became far more complex. Responsibility for investing the assets and generating stable growth over the long term lies with the trustees of a pension fund. However, due to the increased complexity and regulatory burden, their workload has increased dramatically and boards of trustees, have started outsourcing certain tasks. When they do this on the investment side it’s called fiduciary management but you could also see it as a special form of outsourcing. Specialised managers continue to manage the underlying asset classes, the fiduciary manager assumes the task of selecting and appointing managers, overseeing the total portfolio in terms of risk and return and managing the assets in relation to the liabilities.
P: What’s the difference then with the service that consultants are offering?
AW: Consultants are the advisers. In the Netherlands, they stick to that job – they select the managers but may also advise on asset allocation (ALM studies) to ensure the pension funds are reaching their objectives. Here in the Netherlands, they don’t assume legal responsibility for managing the assets. In the UK there are now some consultants, who used to offer only advisory services, but who now also take on legal responsibility for the management of pension fund assets, basically it is what we call fiduciary management. So in the UK, there is now competition between the traditional independent asset managers and the consultants for fiduciary management work.
P: Figures from KPMG on fiduciary management show that more than 50% of fiduciary appointments made by consultants were not referred to an alternative provider in the 12 months to June 2011. What do you think of the trend towards more consultants offering fiduciary management?
AW: Personally, I think it’s very difficult for a consultant to be an independent advisor and also manage the money. This could easily lead to a conflict of interest. They are trying to cope with this by splitting their organisations and creating “Chinese walls”. We think it is not correct to combine these tasks. We don’t advise our clients in that sense, most of them already have an independent advisor, but we help our clients in efficiently making the strategic decisions that need to be made to manage their funds. Alternatively, the board of trustees may appoint someone else (internally or externally) who is responsible for risk management and advice. They have to check that we are managing the money correctly in relation to their objectives.
P:What’s the difference then between fiduciary management and the traditional way of managing pension assets?
AW: Yes, it’s true that pension funds have always appointed managers but these days, we look at the assets and liabilities in a more holistic way. Previously, the money was solely being managed in an asset-only context against traditional benchmarks like the MSCI Europe for European equities but as a pension fund has to pay out pensions over a very long time, this isn’t always appropriate. Also, following the financial crisis, the perception grew that this approach is not working anymore. So we manage assets, when outsourced to us, with a large focus on the fund’s liabilities. Our approach isn’t just about liability-driven investment (LDI), we are also assessing the total risk of the portfolio against the overall objectives of the pension fund. Now, the bigger pension funds have their own teams to manage their assets and don’t need to outsource. For example, APG is an asset manager with essentially one client – their pension fund. We offer our services to the medium to smaller pension funds who have limited resources and a more natural need to outsource. Pension schemes started using the fiduciary management concept in 2003. Currently we see the UK as an important market for us, we see a lot of interest for fiduciary services there at the moment. In the past, UK pension funds managed the assets themselves, with the help of the independent advisor, and the trustees appointed managers. But funding ratios have dropped considerably and the average UK pension fund is currently underfunded. According to Mercer, the average funding ratio of the FTSE 350 companies was 87% at end March 2013. Many UK companies are very uncomfortable having these pension liabilities on the balance sheet as it can lead stock market analysts to view those companies less favourably. So, they are demanding a more sophisticated approach to pension fund management to avoid large swings in the funding ratio. On top of that, the complexity of financial markets has increased, which does make pension fund management more burdensome for trustees. With fiduciary management we work very closely with the client to achieve their objectives. It is more like a partnership where we are acting as their in-house investment team. We write the investment plans for the year ahead and we are in close contact with the pension funds with exchanges on a weekly or even daily basis.
P: According to research by Bureau Bosch, more than 75% of Dutch pension fund assets were managed using the fiduciary management model by the first quarter of 2009. How has your background with the Dutch bank, ABN Amro, helped in this business?
AW: In its day, ABN Amro was a very large and powerful bank in the Netherlands with a lot of institutional clients so it was obvious for us to develop a fiduciary management offering and we were quite successful in that market. After the merger with BNPP IP, we were fortunately still recognised for our expertise in this field and so were able to retain our clients. It also helped that we kept our team intact and that BNP Paribas supported us in this area and wanted us to retain this business line and further develop it. This team has been together since about 2004 when regulations were introduced in the Netherlands requiring that all pension funds had to ensure their liabilities were marked to market. That’s when we started to develop risk management and risk overlay solutions to help clients readjust their portfolios to meet their liabilities. So we have continued to operate in that way but the Netherlands is nowadays a mature market. We have a very good reputation here. Our objective now is to grow in other countries.
P: Apparently there are now more than EUR 1 trillion in assets managed by fiduciary managers in Europe. In which markets do you expect to see the most growth for fiduciary management?
AW: The markets where we see potential for growth are those where there is already a defined benefit (DB) approach to company pensions. In France, for example, there are relatively few DB schemes so this market has fewer opportunities. We’ve discussed the UK and also in Germany the DB schemes have quite an important role. In Germany, a lot of the pension assets are still on the corporate balance sheet so companies need to make sure that it is visible to the outside world that they have enough assets to offset these liabilities. A lot of companies are now trying to get the pension assets off the balance sheet as in the end it can negatively affect an analyst’s view of the company. Apart from the UK and Germany (where we also see an increasing outsourcing trend), other large DB markets are the US and Japan. Neither are currently a target market for us but I do see the potential both in those markets and also in some other countries in Asia. We are trying to sell our broader, multi-asset solutions to clients all over the world when we get the chance.
