Total AUM decreased 5 per cent to £218bn in 2022, primarily as a result of rising yields driving declines in gilts and LDI portfolios and the challenging environment for growth assets, according to isio.
According to Isio’s annual FM survey, “Latest Trends in Fiduciary Management,” which quantifies the effect of difficult market conditions for fiduciary managers,FM recovered in 2022, with a 7 per cent increase in total mandates over 2021. Meanwhile, the growth rate is still below levels seen before 2020, indicating that growth may have peaked, and the total assets under management (AUM) of the sector decreased for the first time since before 2008.
The research also revealed that during the course of the year, the increase in assets from pension schemes that were new to fiduciary management was outweighed by the impact of market conditions on AUM. AUM would have decreased considerably further in 2022 if a few significant schemes hadn’t entered the market through OCIO solutions with fiduciary providers.
Although there are more pension plans utilising FMs of £1bn or more, their share of the market has remained constant. Contrarily, there has been a more noticeable rise in the number of smaller plans employing FMs; those with assets of under £100m currently account for 62 per cent of all mandates, up from 54 per cent in 2021.
Isio asked FMs to estimate their fees for a plan that sought an annual return of gilts plus 2 per cent across five distinct asset size buckets. Except for schemes with a value of £1bn or more, the data reveals no change in fees over the course of the year. In these cases, fees decreased from 0.1 per cent in 2021 to 0.9 per cent in 2022. The information stands in stark contrast to the previous year, when costs for schemes with £1bn or more climbed, while those for mandates with smaller amounts remained the same or decreased.
Isio found that all fiduciary managers have increased liability hedging targets through to June 2022, with the percentage of schemes with more than 80 per cent of their liabilities hedged increasing from 68.6 per cent in 2019 to 94.1 per cent in 2022.
Parallel to this, FMs have cut back on plan return targets, with the percentage aiming for 2.51 per cent to 3.5 per cent over liabilities falling from 28.6 per cent in 2019 to 21 per cent in 2022. The proportion of individuals with aims between 0.51 and 1.5 per cent above liabilities increased from 24.2 per cent in 2019 to 34.4 per cent in 2022.
Isio head of fiduciary oversight Paula Champion says: “This year’s market volatility and challenging macroeconomic environment have tested fiduciary managers, shrinking total AUM despite a healthy increase in mandates among the largest and smallest schemes.
“While it’s great to see schemes are further along their journeys to buyout and self-sufficiency, and the impacts of the CMA’s review are now bedded in, there are significant hurdles ahead for the FM industry. First and foremost is the decision on whether to continue increasing hedging levels following the LDI crisis, as well as a broader revaluation of the role that LDI, which had been increasingly significant to portfolios, should play from here.
“Longer-term, FMs will have to adapt to both the increasing impact of regulation, in particular around ESG, as well as the changing face of the industry as DB schemes mature. Currently, Task Force for Climate-Related Financial Disclosures (TCFD) reporting requirements only apply to schemes with assets exceeding £1bn, but we expect this to be extended to all schemes in the foreseeable future.
“And while DC only accounts for 11.4 per cent of FM mandates versus 88.6 per cent of mandates which are DB schemes, the balance will shift in the future with significant implications for the FM market.”