U.K. Pension Plans Prepare to Dump Consultants
New research suggests British pension investors are re-evaluating their relationships with investment intermediaries.
British pension plans are considering breaking up with their investment consultants.
SEI found in a survey of U.K. plans managing £42 billion of assets ($54.9 billion) that 87 percent will be reviewing their consultants in the next two years, and 60 percent would consider dropping the traditional consulting model, according to a company statement this week. The defined benefit plans had £20 million to £6 billion of assets each.
SEI’s findings highlight conflicts of interest perceived to be an issue by pension trustees, including situations where consultants may be tempted to recommend their own in-house strategies or those of asset managers with whom they have a close relationship. The Financial Conduct Authority recently made an inquiry into competition in the investment consulting sector, with the regulator’s public commentary period closing this week.
“The potential conflict of interest is a matter which does concern trustees,” said David Weeks, co-chairperson of the Association of Member Nominated Trustees, in an interview. “By setting up a beauty parade for who will take over, you can spell out what you find acceptable and what is not acceptable.”
The Pensions and Lifetime Savings Association, which represents more than 1,300 retirement schemes in the U.K., said this week that its members have expressed concerns about “the potential misalignment of incentives in the industry.” With £1.9 trillion of assets under management, pension funds represent 57 percent of all institutional investments in the U.K., according to PLSA data.
The FCA conducted its inquiry as part of a wider market study of asset managers, concluding that the investment consultant industry may require further scrutiny from the Competition and Markets Authority, CMA. While consultants have suggested revisions to their operating models and business practices, the changes they’ve proposed to the FCA were “insufficient” to resolve the problems that exist in the market, according to Caroline Escott, investment and defined benefit policy lead at the PLSA.
“The Financial Conduct Authority identified issues on both the demand and supply side of what is a complex and evolving market,” she said in a statement this week.
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A Competition and Markets Authority investigation could probe competition in greater depth and recommend far reaching remedies. “We would support a referral to the CMA and hope such a step would ensure a market which works in the best interests of pension schemes and their members,” Escott said in the statement.
In an interview, Escott added that some consultants have been very co-operative with the regulators, but the FCA’s market study had raised the profile of long-standing issues that still irk trustees.
“Regulation of investment consultants has been something that has come up in previous regulatory reviews such as the Myners Review, and later in the Kay Review,” she said by phone. “Institutional investment intermediation is very complex and that is perhaps a reason for why it has taken this long.”
In a response to today’s survey findings, Mercer, a major investment consultant in the U.K., reiterated its commitment to “serving its clients and their needs.”
“We proposed a package of proposals which include a mandatory tendering regime, performance and fee standards and conflicts of interest protocols,” a spokesperson for Mercer said in an emailed statement. We believe this package benefits our clients.”
The FCA declined to comment about SEI’s findings.