In the run up to the CMA announcement today, we were hoping to see three key things: a focus on objectives and strategy as the most important drivers of pension outcomes, momentum behind a system of consistent rating/benchmarking of consultants and due regard taken of the potential burden on trustees that heavily prescriptive demand side behavioural remedies might have.
We certainly feel we got two out of those three and, while the CMA provisional decision does not appear to suggest a “big bang” immediate re-shaping of the industry, we do feel that it sets the scene and provides opportunity to shape and influence the industry over time that will benefit members.
Firstly, we were pleased to see the nuanced position of competition in the investment consulting industry presented by CMA. It had been clear their thinking on this developed over the course of the investigation. Competition has increased over last 10 years. New firms, and teams (including us) have entered the market, expanded and been able to outcompete incumbents in many areas. Competition is tough, but I’m proud to be part of a small team driving change over last decade. I imagine others out there will feel the same.
Secondly, the CMA have acknowledged – quite rightly in our view – that any demand-side behavioural changes might well risk placing quite a large burden on trustees, especially at the smaller end, and they’ve clearly tried to go for remedies that could apply across the pension scheme size spectrum. Much of the implementation has been left to TPR, which is again sensible in our view given TPR’s role as provider of much existing guidance to trustees. They will be able to ensure any new guidance fits in appropriately and is joined-up. The effectiveness of these remedies clearly depends on the implementation by TPR.
What did the report contain that we were pleased to see?
One of the first things I noticed when I started reading the report was the emphasis placed on the need for strategic objectives around each investment consultant appointment. This was great to see, and something we consistently tried to champion through the whole process. We believe that’s fundamentally important. This has been a key part of our proposition to clients and, as simple as it might sound we believe that setting clear long-term (strategic) objectives will help to drive better outcomes as each decision and change to scheme strategy can always be measured against those objectives. Everyone feels like they are pulling in the same direction. Without such objectives, it can be easy to tread water and focus on the all wrong things.
Secondly, we were pleased to see proposals for required warnings around marketing material in the provisional report. Marketing material should not be confused with independent investment advice, but the line between the two can and does frequently get blurry, particularly when firms have products to sell that may generate significant commercial upside. Great to see the CMA emphasising the distinction, but the effectiveness here will depend on how this is executed in practice. Disclaimers do not always have a large influence on behaviour. In today’s asset management marketplace, with so many products available, we believe the value of truly independent investment advice has never been higher.
Thirdly, we welcome the move to bring more of investment consulting business under the FCA’s regulatory perimeter. It has always seemed a little odd that this was not the case. Given the reach and significance of the advice given, affecting the pensions of tens of millions of individuals, and sponsoring employers that make up a significant part of the UK economy; this seems warranted. We look forward to contributing to the debate on how this should be executed to balance efficacy with the burden placed on smaller firms.
Could the report have gone further?
There were a couple of other things we would have liked to see but which didn’t feature.
Throughout the process, we have been strong proponents of a system of benchmarking and rating consultants. We are well aware of the risk of clients not taking each part of our advice as a potential threat to any track record. We are happy to accept this risk as we believe we are responsible not just for dispensing advice in a vacuum but also training, educating, tailoring and delivering the advice in such a way that makes it most useful and implementable. We will continue to calculate our own aggregated client performance track record (which shows that our clients, on average, have significantly outperformed the wider DB universe at lower volatility over the last decade). We also plan to continue to support and work with industry initiatives to standardise the reporting of consultant track records. We believe this could put really helpful information into the hands of trustees conducting tenders, allowing them to ask the question – why has my performance been different? One fear we have is that without a focus on overall performance, undue weight might be placed on performance statistics within the manager selection component, which the CMA has specified be produced in accordance with set guidelines.
Finally, we also advocated for a TripAdvisor or Checkatrade type review platform for investment consultant reviews. We believe this would be a great way for small firms delivering outstanding service to clients to get more recognition, and has become a standard and familiar feature of many other industries. We continue to believe this could benefit trustees and it remains an idea that could be picked up by a suitable independent body.
There was also significant mention of DC in today’s report:
- The CMA clearly identifies more needs to be done and not enough time is given to DC at the moment.
Schemes don’t seem to be reviewing DC member outcomes and frequently as they should and this creates a risk of members not getting at good outcome at retirement.
- CMA calls for DWP and TPR to help trustees look more closely at DC and how they can help their members better.
From our perspective we highlight to our clients the importance of member outcomes. There are investment benchmarks and targets that need to be monitored, but this should be as well as considering overall member outcomes.
There is the need to separate DB from DC in terms of governance time. We know many larger clients are able to do this but we need to find a better way to help trustees of smaller schemes, or closed DC schemes. It is a critical time for us and we need to get it right. Millions of people will be relying on their DC savings to fund their later life, it is our combined responsibility (trustees and consultants) to do the best we can for our members.
In summary, no “big bang” today from the CMA, but a nuanced – and accurate – depiction of competition in our industry and due weight given to the potential burden on trustees of increased regulation. We are encouraged to see the focus on strategic objectives, and disentangling marketing material from investment advice, and see these as setting the scene well for continued shaping of the industry over coming years.