The fiduciary management market faced challenges stemming from the gilts crisis, impacting the broader pensions industry this year.
Liquidity provided a significant obstacle, making it difficult for fiduciary managers to source funds for Liability Driven Investment (LDI) portfolios to satisfy liability hedging requirements.
Fiduciary managers adjusted to the changing market by providing simpler portfolios and competitive fees, which let smaller clients join. As portfolios changed, liquid assets and equity were preferred over illiquid assets and debts.
Isio’s ‘Latest trends in Fiduciary Management’ survey highlighted the impact of challenging conditions on fiduciary managers, with a decline in assets under management (AUM) and the first-ever decrease in the number of schemes using fiduciary management.
The market makeup shifted, reflecting a decrease in AUM, with more clients in lower AUM buckets. There was a return to equity investments, marked by increased liability hedging and a move away from illiquid assets toward liquid alternatives and equity.
Falling AUM and growing cost inflation prompted fiduciary managers to reevaluate pricing structures; some adopted performance-linked and tiered fees. The proposed fees for schemes that aim to achieve particular returns have decreased in various asset-size buckets, suggesting a rise in market competitiveness.
Long-term objectives showed a focus on end-game planning, with liabilities + 0.5%-1.5% as the most common return target. The fiduciary market emphasised insurance capabilities, with an increasing number of schemes nearing buyout objectives. However, the capacity of insurers will influence the extent of insurance transactions in the next five years.
On the other hand, partial buy-ins decreased as schemes gave portfolio liquidity a higher priority in order to fund obligation hedges. Targets for average hedging levels fell a little, which caused a move towards customised arrangements like segregated LDI for more efficiency and flexibility. The trend of schemes moving from pooled to segregated LDI is expected to rise as fiduciary managers adapt their client base.
Isio head of fiduciary management oversight Paula Champion says: “This time last year, the gilts crisis was a recent event, and we were asking the question – has growth peaked? While this year’s findings show that it has stalled at least temporarily, the requirements from LDI portfolios during the gilts crisis have put a bigger governance burden on trustees. This has brought the governance and operational benefits from FM into the spotlight. We predict we could continue to see a gradual uptick in new schemes entering the market to reduce this burden.
“The unprecedented events of last year have arguably changed the face of the industry forever, but fiduciary managers are identifying new opportunities and have continued adding value to schemes who have grappled with the market conditions and tighter regulatory landscape. The move back to equities, in particular passive equities, also emphasises that FMs understand the focus is on delivering return without sacrificing liquidity in 2023.”
