The Competition and Markets Authority (CMA) has proposed a number of reforms to the £1.6 trillion investment consultancy and fiduciary management sector after identifying a range of competition concerns.
Investment consultants advise pension trustees, who oversee companies' pension schemes, on how to invest their funds. Some pension schemes delegate investment decisions to fund managers.
Overall investment consultants have influence over half of all UK households' retirement savings and work with pension scheme assets worth at least £1.6 trillion.
The investment consultancy market is dominated by three players, Aon Hewitt, Mercer and Willis Towers Watson.
The Financial Conduct Authority (FCA) formally referred the industry to the CMA last September, after proposing it should be bought into the scope of consumer regulation.
The FCA had levelled sharp criticism at the consultancy industry in both its interim and final Asset Market Reviews in the last 18 months, warning that the sector exhibited a ‘weak demand side with pension trustees relying heavily on investment consultants but having limited ability to assess the quality of their advice or compare services’.
In its provisional decision today, the CMA noted that while pension schemes can choose from a range of different firms, it was clear there were competition problem within both the investment consultancy and - to a greater degree - the fiduciary management markets.
John Wotton, who chaired the CMA's investigation, said: 'We're concerned that pension schemes are not currently putting pressure on the market to get the best value for money on behalf of their members.
'They may lack the information they need to compare competing offers and so could be sticking with their existing investment consultant or fiduciary manager when there are better options available.'
The CMA identified three major competition issues.
* Around half of pension schemes choose the same provider for fiduciary management that they use for investment consultancy.
'Their current investment consultant can steer them to do this. This means companies which offer both services have an advantage over other firms, when it comes to getting this business from existing clients,' the CMA highlighted.
* A number of pension trustees have low levels of engagement with providers in the sector when choosing their first fiduciary manager.
'Only a third of trustees ask firms to compete for their business through a tender process, meaning no competitive pressure is put on their existing investment consultant or fiduciary manager to offer the best terms or highest performance,' the CMA said.
* Pensions trustees often do not have sufficient information on the fees or quality of these services to be able to judge if they are getting a good deal from their existing investment consultant or fiduciary manager, or if they could do better elsewhere.
The CMA has proposed a number of changes to the sector to address these competition concerns.
A key proposals is that pension trustees selection their first fiduciary manager must run a competitive tender.
'Trustees who have already appointed a fiduciary manager without doing this must also put the role out to tender within five years,' the CMA said.
'This would increase competition in the market and reduce the competitive advantage held by the incumbent investment consultant when it comes to getting the new business.'
The CMA also suggested fund management firms must provide clearer information on fees and how they have performed for other clients, so that pension trustees have the information they need to make meaningful comparisons between different providers.
Additionally, the CMA is making recommendations for new guidance from the pensions regulator, which would provide trustees with more advice on how to choose and scrutinise providers.
It is also proposing that the government broadens the FCA regulatory scope, to ensure greater oversight of the industry.
'This is an extremely important sector that influences how well millions of people's pension savings are invested, and it's therefore vital we take steps to make sure that competition is working properly,' Wotton said.
'That's why we're proposing a number of important reforms to the sector, including requiring pension trustees to run a competitive tender when they choose a fiduciary manager and ensuring that trustees have much better information about fees and investment performance.'
The proposals were welcomed in the industry.
Richard Dowell, co-head of clients at risk management firm Cardano, said it was 'fantastic' to see the CMA progress so many of the remedies required to improve this industry, describing the proposals as 'pragmatic'.
'The industry will scrutinise these recommendations over the coming weeks and consider how they will benefit the industry at large. It is important that all parties, including the pensions regulator, now work together to support trustees in their work on behalf of beneficiaries,' Dowell said.
Dowell noted that the only stone that perhaps remains unturned is what the data gathered by the CMA can tell us about the impact of adopting fiduciary management versus advisory.
'Given the focus on transparency, publication of the aggregate performance data collected through the course of this enquiry would demonstrate whether, as a whole, outcomes have been better for those that chose fiduciary manager even though the CMA is concerned how the market has developed.'
David Curtis, head of institutional business UK & Ireland for Goldman Sachs Asset Management, described the proposed remedies as positive, highlighting the critical importance and responsibility of providing advice and ensuring accountability.
'The adoption of these remedies would bring the broader industry closer to the standards of transparency already required in asset management where mandatory tendering, performance comparison, fee transparency and regulation already exist,' Curtis said.
'The enhanced governance model that fiduciary management provides enables trustees to concentrate on the strategic decisions that are critical to pension schemes’ long-term success.
'It is crucial they are able to access and evaluate advice and performance in a transparent, open manner. We welcome the CMA’s ongoing focus on achieving this.'
The CMA has set a 24 August deadline for feedback in its provisional decision. It will publish its final report on 13 March 2019.