05 June 2016

Financial Times: Pensions’ fiduciary management plagued by conflicts of interest

The UK financial regulator should introduce additional safeguards to counter the significant conflicts of interest where consultants provide pension scheme clients with fiduciary management services.

While conflicts of interest are inherent in any consulting business, they come into particularly sharp focus where investment consultants offer fiduciary management — sometimes called implemented consulting — services.

Indeed, under these circumstances, the trusted position of the investment consultant is in danger of breaking down. The conflicts of interest created are too important to be managed purely by relying on market competition and the professionalism of consultants.

The conflicts are most obvious when investment consultants are advising on — often selling — their in-house fiduciary offering. The vast majority of fiduciary management arrangements have been set up with a pension scheme’s existing investment consultant, without a tendering process where the trustees consider alternative providers.

Although this is changing, conflicts of interest do not end with the choice of fiduciary manager; they permeate every aspect of their business.

The FCA should support trustees by recommending in its review that the current requirement for schemes to take formal written investment advice is not fit for purpose where that advice can be given by the entity providing the investment management services.

Instead, the requirement to take advice should be strengthened so that such advice is genuinely independent and that regular independent performance reviews are necessary.

Full article (FT subscription required)

© Financial Times