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Investment governance is getting tougher

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Trustees should start preparing for the new requirements in relation to fiduciary management (FM) and investment consultancy (IC) services they receive.


From 10 December 2019, new governance requirements will apply to trustees in relation to the fiduciary management (FM) and investment consultancy (IC) services they receive. The new requirements are intended to improve trustee engagement when buying FM and IC services, as well as better and more comparable information on fees and performance.

By way of background, FM involves the delegation by trustees of some investment decisions to advisers. In broad terms, IC is the provision of advice to trustees on investment strategy and related matters.
Draft regulations published by the DWP on 29 July 2019 integrate into pensions law an order produced by the Competition and Markets Authority (CMA) following its investigation into FM and IC services to pension schemes. The new regulations will also enable the Pensions Regulator (TPR) to oversee the new requirements.
Whilst the new regulations are not scheduled to come into force until 6 April 2020, the CMA’s order will take effect on and from 10 December 2019, and so will apply to pension schemes in the interim.

New obligations
With effect from 10 December 2019, the CMA’s order will:
·       require pension scheme trustees who wish to delegate investment decisions for 20% or more of their scheme assets to run a competitive tender when first purchasing FM services

·       require pension scheme trustees who have already appointed a fiduciary manager (or managers) for 20% or more of their scheme assets without a tender, to put the service out to tender within five years of the appointment. If the five-year period has already expired, or will do so within two years of the date on which the CMA order was made (10 June 2019), the tender must instead be run before the end of a two-year period beginning with the date of the order, i.e. before the end of 9 June 2021

·       prohibit trustees from entering into a contract with an IC, or from continuing to obtain IC services from an IC, unless they have set the IC strategic objectives.

Scope of the new regulations
The new regulations will apply to most occupational pension schemes established under trust (subject to some exceptions).
The following schemes will also be excluded from the requirement to carry out a competitive tender for FM services:
·       schemes where the principal or controlling employer, or a connected company (broadly, a company in the same group) provides FM and / or IC services to the schemes

·       schemes whose trustee(s) provide FM and / or IC services to the scheme

·       master trusts for which an IC-FM firm (or a connected IC-FM firm) is the scheme strategist or scheme funder.
The DWP considers that it would be impractical, in the above circumstances, to expect the scheme trustees to carry out a competitive tender for FM. However, it believes it is reasonable for the trustees to set their IC objectives and to monitor performance against them.

Mandatory tendering
Like the CMA order, the new regulations require trustees to carry out a “qualifying tender process” (or to arrange for such a process to be carried out on their behalf), before appointing an FM provider, or increasing the amount of assets managed by an FM provider, where either would result in the “asset management threshold” being met for the first time.
A “qualifying tender process” means “the process of:
·       inviting, and using reasonable endeavours to obtain, bids for the provision of the relevant FM services from at least three unconnected persons, and

·       evaluating the bids which are obtained”.
The “asset management threshold” is met if 20% or more of the “manageable assets” of the scheme (the assets, excluding buy-in policies) are managed by FM providers.
Setting objectives for investment consultants
In setting objectives, trustees must have regard to their statement of investment principles. The new regulations will require trustees to:
·       set objectives for each IC provider (except one who is a scheme trustee or a company wholly owned by the scheme trustees)

·       review and, if appropriate, revise an IC provider’s objectives at least every three years and without delay after any significant change in investment policy.
The DWP also notes in the consultation that it expects the objectives to:
·       include a clear definition of the outcome expected to be delivered and the timescale over which it will be delivered;

·       be relevant to the services provided, and

·       enable the trustees to measure the performance of the IC services provided.

Guidance from TPR
TPR has also published a consultation on a suite of guidance documents aimed at supporting trustees in meeting their new duties and engaging with their providers.

Next steps
As noted above, the CMA’s order will take effect on 10 December 2019. Trustees should therefore start preparing for the new requirements and commence work with their investment consultants to document their “strategic objectives” straight away.

In addition, trustees will need to consider the basis on which any fiduciary manager(s) have been appointed and where a competitive tender process is required.

To assist trustees with meeting the new requirements it is worth noting that fiduciary managers and investment consultants will also have new reporting obligations relating to charges, fees and performance which will make it easier for trustees to compare providers effectively.

Nigel Cayless, Associate Director at Sackers