The Competition and Markets Authority (CMA) is to introduce a series of sweeping reforms to the investment consultancy sector after finding many pension consultants are getting a ‘worse deal’ by not tendering out fiduciary management contracts.
In a move to separate the two services, the CMA will now require that pension trusts who wish to delegate the investment decisions for more than 20% of a scheme’s assets must run a competitive tender with at least three firms. This comes after it found that only a third of trustees ask their investment consultants to tender to be their fiduciary manager, even if better deals are available elsewhere.
Trustees who have appointed a fiduciary manager without a tender process will be required to hold one within five years in a move designed to improve competitiveness and reduce fees.
Fiduciary management firms will also be required to provide clear information on their fees, as well their past performance.
The CMA has also recommended that The Pensions Regulator (TPR) produces new guidance for trustees on choosing investment consultants and fiduciary managers. It has also called on the government to increaser the Financial Conduct Authority’s scope to ensure greater regulatory oversight of the sector.
John Wotton, chair of the CMA’s investment consultants market investigation, said: ‘This is an extremely important sector that influences how well millions of people's pension savings are invested, yet we've found that many pension trustees may not be getting the best value for money for their members. Some lack the information they need to compare providers and so could be sticking with their existing investment consultant or fiduciary manager when there are better options available.
‘It's therefore imperative we make these changes so that the sector works better for those it is meant to support - pension scheme members.’
The measures will be put out for consultation in early 2019 with the implementation of the new requirements expected to begin later in the year.
Nick Evans, a partner and head of investment advisory at KPMG supported the CMA's move, branding it a 'sensible and important development for the industry'.
'In the investment consulting market, having clear strategic objectives set by trustees to assess the quality of the advice is a welcome development. As identified by the CMA, the relationship between quality of advice and market share is not as it should be. More competitive tendering should help trustees to better assess the quality of advice and reduce concentration in this market,' he said.
'In the fiduciary management market, as our recent survey found, only around two thirds of new fiduciary appointments were assisted by independent advice. There is room for improvement and the CMA’s findings will help. It is also good for the fiduciary market that transparency on costs will be addressed and trustees will be have better visibility on performance.'
The investigation was launched when the Financial Conduct Authority (FCA) formally referred the £1.6 trillion sector to the CMA last September after finding a lack of competition, prompting it propose bringing it under the scope of consumer regulation.
The FCA was also critical of the consultancy industry, which is dominated by just three players –Aon Hewitt, Willis Towers Watson and Mercer- in its review of the asset management sector.
In its provisional findings, published in July, the CMA identified three major competition issues, which it aims to remedy with the new rules outlined today. The three problems were the fact around half of pension schemes just take fiduciary management from their investment consultants, pension trustees are lax in tendering for services and information on fees is insufficient.