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2018 KPMG UK Fiduciary Management SurveyInvestment Advisory

kpmg.com/uk

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2018: Fiduciary management industry “pausing for breath or quitting the race?”The pace of growth in pension scheme fiduciary mandates slowed down significantly over the year: numbers increased but more slowly than in previous years. We now estimate 15% of pension schemes1 now appoint a fiduciary manager – about 70 more schemes than 2017. The Competition and Markets Authority’s (“CMA”) review of the fiduciary management industry over the year is likely to have contributed to the slow-down. Alongside this, it is now becoming normal practice for trustees to seek independent advice when appointing a new fiduciary manager – occurring in two-thirds of new appointments over the year.

Slowdown in growth

The year to 3 0 June 2018 has seen a slow-down in growth in the number of new fiduciary mandates – still a healthy 9% increase butthe slowest since we began tracking the pension scheme fiduciary market in 2008. TheCMA review is probably a key factor with some pension scheme Trustees adopting a “wait and see” approach while the investigation into Investment Consultancy and Fiduciary Services was carried out. It now seemslikely that UK Fiduciary Managerswill not significantly change their investment offering to pension schemes as a consequence of the CMA review – so this year mayrepresent a blip rather than a signal for lower growth rates long term.

Independent oversight

6 6 % of new fiduciary appointments were assisted by independent advice – a slight increase from 6 0% in 2017. We believe taking independent advice is best practice and are encouraged to see that is now becoming established as normal practice too. However the number of pension schemes receiving independent advice after appointment on an ongoing basis remains low at about a fifth. We think that more schemes could benefit by formalising the way they assess their fiduciary managers.

Engagement on ESG

Over 58% of schemes engaged with their fiduciary manager on ESG-related issues in the last year. This itself is a mixed message, yet the extent of engagement varies widely between generic discussion to bespoke action. As the Department of Work & Pensions will require Trustees to state their ESG policies in their SIP document from late 2019, we expect many schemes using fiduciary management will be forced to demonstrate greater ESG engagement.

Anthony Webb,

Head of Fiduciary Research at KPMG

1 Number of defined benefit schemes using full and partial fiduciary management compared to number of defined benefit schemes in the PPF Purple Book 2017, which listed 5,588 PPF eligible UK Defined Benefit Schemes.

Change vs 201730% 20% 40% 60% 80% 100%

Equity

Credit

Alternatives

Property

Interest rate hedge

Inflation rate hedge

2

2

ESG and fiduciary management

The majority of schemes engaged on ESG over the last 12 months yet average engagement is low.

We measured the extent to which schemes had engaged with their fiduciary managers on ESG.

Not at all

42%

Light touch review

44%

Thought about it carefully

14%

Taken bespoke action

1%

Asset allocation1

Portfolios differ widely although the majority favour high hedging levels

We asked fiduciary managers to tell us how they would invest the assets of a scheme with £500m of assets targeting a return of Gilts +3% per annum. The range of responses is set out below.

How to read the chartThe white lines represent the complete range of responses. For example: the highest allocation to equity was 77% of assets1 and the lowest was 16% of assets.

The white rectangles show the middle 50% of responses. For example 50% of managers allocated between 37% and 48% to equity funds. 25% of managers allocated more to equity than this range, and 25% of managers allocated less.

The purple lines show the average (median) response.

The survey results presented are based on the responses we received from the following fiduciary managers operating in the UK pensions market, with data as at 30 June 2018. The measurement period for wins and losses is the 12 months to 30 June 2018.

– Aon Hewitt– BlackRock– Cambridge

Associates– Cardano

– Charles Stanley Asset Management

– Goldman Sachs Asset Management

– JLT

– Mercer– Kempen– Legal & General– River & Mercantile

– Russell Investments– Schroders– SEI– Willis Towers Watson

1 Expressed as a percentage of non LDI assets2 Expressed as a percentage of Scheme assets3 Change is defined as a majority of fiduciary managers increasing or decreasing their allocation

We thank each provider for their input in this exercise. We have relied on the information provided to us by the fiduciary managers as being correct.

© 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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2018 Highlights

31 57 79 104 105 125 135205 232 249 255

28 36 4769

135174 211

303377

544607

Nu

mb

er o

f man

date

s

Ass

ets

unde

r man

agem

ent

8 1723 29

38

53

81 89

Mar

ket

Siz

e

Growth in the number of mandates

862Total mandates

in the UK

Note: Some providers restated 2017 figures.

Growth in assets under fiduciary management

Partial Full

SpecialistConsultant Investment Manager

setan

d M

a o

fu

mb

erN

60% 66%

2017 2018

2017 2018

19% 21%

Partial Full

3124 28 28 30 3418 10

47 53 542

32

£142billion

Note: Some providers restated 2017 figures.

Mar

ket B

reak

dow

n

Proportions of mandates by size

Big and small schemes are using fiduciary management.

This distribution is broadly equivalent to the proportion of big and small pension schemes in the UK.

2018 distribution of mandates

64% 23% 8% 3% 2%

Change over the year + 1 %

<£100m £100m to £250m

-1 %

£250m to £500m

£500m to£1bn

>£1bn

Number of fully delegated mandates by provider type

“Consultants” continue to manage the majority of mandates.

Independent advice

We define independent advice as written advice provided to the Trustees from a third party.

66% of new appointmentsthis year were advised by an independent third party.

21% of schemes use an independent third party overseer to review the mandate on an ongoing basis.

Note: Some providers restated 2017 figures.

Sources for data in this survey:

Fiduciary providers and KPMG calculations.Additional Notes:

We have relied on the information supplied by the participants as being correct. KPMG has not tried to independently verify the information provided.

Unless labelled for full or partial mandates, data/comments are shown for full FM mandates only. Where data was not available for a specific question from a fiduciary manager, this manager was excluded from that part of our analysis. This is not expected to have a material impact on the figures.

© 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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KPMG and fiduciary management adviceIndependence and experience are a valuable combination in an ever-changing fiduciary management landscape.

KPMG do not offer fiduciary management. We are therefore well placed to provide advice that is truly independent.

KPMG’s Fiduciary Management advisory services for pension schemes combines investment consulting experience, internal-controls and operational due diligence expertise, combined with our pensions thought leadership.

What services does KPMG offer?

KPMG provides advice on a wide range of fiduciary management aspects, including but not limited to:

Governance assessmentDeciding if fiduciary management is appropriate, and if so, which governance structure is right.

Fiduciary management selectionFrom setting criteria to assisting with selection exercises.

Mandate & guidelines set-upSetting up and designing the framework against which to measure the provider.

Ongoing review & reporting

Independently checking progress against objectives and providing challenge where necessary.

so

rt

Ed

i

Anthony Webb FIA

Head of Fiduciary Research, Investment Advisory

KPMG, 15 Canada Square, London E14 5GL

+44 (0)20 73 11 8508+44 (0)75 5758 7509anthony.webb@kpmg.co.uk

Faye Mullen CFA

Assistant Head of Fiduciary Research, Investment Advisory

KPMG, 1 Sovereign Square,Leeds LS1 4DA

+44 (0)11 3 231 3 076+44 (0)74 6 835 9450faye.mullen@kpmg.co.uk

Au

tho

rs

Alex Owen

Consultant, Investment Advisory

KPMG, Arlington business ParkTheale, Reading RG7 4SD

+44 (0)11 896 4 2501+44 (0)75 5422 3 716alex.owen@kpmg.co.uk

Shawn Ngao Mwatu

Assistant Consultant, Investment Advisory

KPMG, 15 Canada Square, London E14 5GL

+44 (0)20 76 94 3 768+44 (0)73 9286 0739shawn.mwatu@kpmg.co.uk

Definitions used in this survey

Full delegation – the fiduciary manager is typically engaged under an investment management agreement to manage 100% of scheme assets. The services provided include all or the majority of the following: journey plan design, strategic and tactical asset allocation, growth and matching portfolio structuring, manager selection, implementation and administration.

Partial delegation – trustees delegate only a subset of the investment management to provider. The subset may comprise a portion of the scheme assets or a portion of the “full fiduciary” responsibilities. The subset must also be subset of an alternative full fiduciary management service provided by the same firm.

Environmental, Social and Governance (‘ESG’) – investing with an awareness of the wider risks associated with the impact of investments on society as a whole.

Engagement definitions – “Light touch review” is engagement on specific ESG policies, “Thought about it carefully” is defining objectives within investment guidelines, “Taken bespoke action” includes screening investments.

For further information on fiduciary management…

…please see our three page guide, which addresses the questions:

– Is fiduciary management right for me?

– How to choose a fiduciary manager?

– How do I keep my fiduciary manager on track?

This is available at the link:https://home.kpmg.com/uk/en/home/services/tax/pensions/fiduciary-management-advisory.html

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.© 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.