DWP regulations to replace the current CMA order on fiduciary management and investment consulting have been delayed, but what is the reason, and what could the changes mean? 

 

The Competition and Markets Authority published an order in 2019 which requires pension funds to run a competitive tender for fiduciary management every five years and to set strategic objectives for their investment consultant. The edict followed an asset management market study by the Financial Conduct Authority which found a lack of competition and conflicts of interest in consultancies that run a fiduciary management arm. The FCA found only 13% of schemes ran a competitive tender when the consultant proposed fiduciary management and 41% of respondents had not considered more than one fiduciary manager. 

 

 

The order was due to be replaced by regulations from the Department for Work and Pensions in April 2020, but a response is now due in the first half of this year. 

 

Ian Neale, director at pensions technical specialists Aries Insight, said there was “something of a mystery” around the delay in the publication of the regulations, “especially since they purport to align the legislation governing occupational pension schemes with the CMA Order” and also given that the Pensions Regulator – which will become the entity enforcing the rules – has already published extensive guidance.   

 

Neale said it is not clear what caused the delay but said given how last November’s transfer conditions regulations were altered between draft and final version, one possible reason was the difference in scope between the regulations and the CMA Order.  “Whilst most of the exempt categories in the CMA Order were essentially mirrored in the draft DWP Regs, not all were.  One important category of pension scheme is not exempt, ie certain master trusts,” he observed. 

  

In its consultation, the DWP differed from the CMA in its stance on master trusts whose scheme strategist or funder is an investment consultancy or fiduciary management firm. The CMA order excluded such master trusts from its requirements. The DWP said it agrees that it would be “impractical in these circumstances” to expect the trustees to carry out a tender for fiduciary management when they would have a preference to use the sponsoring employer’s services, but added: “However, we believe it is reasonable for the trustee to set their IC objectives and monitor performance against them, regardless of whether the IC is connected with the sponsoring employer of the scheme. The member can suffer detriment if this is not done.” 

 

Neale said that master trusts in scope for this “might have pushed back in responding to the consultation”. 

 

As well as this, the definitions of investment consultant, fiduciary management and advice in the draft regulations “were seriously problematic for the Investment Association”, the industry body representing firms most closely involved, he noted. The IA had written a letter to the DWP during its consultation, in which it raised “serious concerns over the IC and FM definitions” in the draft regulations, saying the definition of advice was “too broad” and the scope of what is defined as ‘investment decisions’ in FM services “too wide”. 

 

Building on the assumption that the DWP’s delay in responding is to do with the responses it received to its consultation, “the introduction of yet another onerous compliance regime with significant penalties proposed might have been a factor in any DWP reconsideration”, said Neale – though he also pointed out that the DWP has ignored industry complaints during its consultation on the Fraud Compensation Levy, where master trusts were among the most aggrieved, and might therefore do so again. 

 

 

When the regulations do come, the DWP will rely on the Pensions Regulator to enforce them. While fees have already been driven down and TPR guidance is already available, some changes are still expected, and even hoped for. 

 

“When this eventually moves to TPR – and I don’t know how reliable H1 2022 is as a timeline – my main hope is that TPR provides better guidance to pension schemes on the ongoing monitoring of FM arrangements,” said Peter Daniels, head of fiduciary manager evaluation at consultancy Barnett Waddingham. 

 

“Currently we have guidance on whether to move to FM and how to select a provider, but nothing on how to evaluate whether they are doing a good job. This is such an important area given the level of financial decision-making responsibility trustees are delegating to providers,” Daniels said. 

 

Richard Dowell, co-head of clients at fiduciary management firm Cardano, said the change from CMA to TPR was welcome as TPR provided a “natural place for the oversight”. 

 

Dowell did not expect major changes to flow from the new regime, however: “Although some changes should be expected as a result of the move to TPR, we don’t think they will be significant for many trustees as they will already have the governance in place to comply with the CMA Order.” 

 

Have the DWP’s draft regulations ruffled some feathers in the FM/IC space?