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Pensions Speedbrief: FCA's interim report on asset management market - points for trustees to consider

  • United Kingdom
  • Pensions
  • Pensions - Defined benefit
  • Pensions - Defined contribution
  • Pensions - Investment


In November 2016, the FCA released the Interim Report on its Asset Management Market Study which looked broadly at the asset management sector. Most of the news and focus for pension scheme trustees coming out of the study has been around the consultation and the market investigation reference to the Competition and Markets Authority in relation to investment consultants. However, the study also contains a number of findings that are directly relevant to pension scheme trustees. This speedbrief looks at five of the findings that we think are worth trustees considering.

Presenting information about investment choices to DC members

The FCA study looked at both the institutional (eg trustee) and retail investor market. Although the findings in relation to the retail market were not specifically considering pension scheme members, the findings can be read across into money purchase arrangements (including AVC arrangements) where members are offered a choice of investments and are presented with investment information.

The FCA found that past performance remains an important driver of choice for non-advised retail investors. These investors, much like DC members, are likely to rely heavily on the past performance of a fund in assessing their choice of fund, but past performance does not help investors identify funds that are likely to outperform in the future. Trustees may wish to consider how much their communications to members feature past performance information and whether, directly or indirectly, the communications may be putting too much weight on the past performance of funds.

The study also looked at studies on the presentation of cost information to retail investors and noted that how charges are presented has a significant effect on investor’s ability to understand them. In particular, presenting charges as percentages could lead to confusion and investors making sub-optimal choices because they cannot understand the charges. Trustees may wish to consider how charging information is presented to members and whether there may be more effective means of communicating charges.

Information presented to trustees makes it hard to assess manager performance

One of the FCA’s findings is that information presented by asset managers or compiled by investment consultants “often include[s] lots of information which can make it difficult for [trustees] to identify the important points they should be focusing on, so making it difficult to assess performance”. The study also found “when reporting performance of managers to whom consultants have given high ratings, there are instances where reporting, while not incorrect, is presented in a way that poor performance is difficult to identify or may not be sufficiently transparent”.

Trustees may wish to consider whether the information they are receiving on the performance of their managers is sufficiently clear and easy to understand to allow the trustees to assess the performance of the managers based on the skill set of the trustees. If trustees are having trouble interpreting the information being presented to them, they should not keep their concerns to themselves and should raise this both with their fellow trustees and their investment consultants.

Trustees should ensure they are getting suitable advice and feel comfortable to challenge the advice of their consultants

The FCA noted that there were concerns from some smaller pension schemes that they receive the same advice that is given to multiple clients and that the advice is tailored to their needs. This also dovetailed into the study’s findings about the difficulty trustees can face in engaging with and challenging their consultants’ advice. The study found that trustees have a tendency to rely heavily on consultants, chairs of trustees or professional trustees that they perceive as having greater investment knowledge. This can lead to trustees accepting investment strategies without critique or challenge. The FCA also saw examples of trustee training materials that discouraged challenging consultants’ advice by highlighting the risks of trustees going against consultants’ advice.

Trustees need to ensure they are effectively discharging their duties as trustees and should check that they are able to understand and critique the advice presented to them. They should ensure that their structure and knowledge and understanding as a whole is such that it enables them to provide an effective challenge to advice received and to ensure that it is appropriately tailored to their needs.

Getting the balance right between manager selection and asset allocation

One of the concerns raised in the study relates to the time that trustees spend on manager selection which diverts time away from more important strategic matters such as asset allocation. The FCA’s qualitative research suggests trustees tend to focus more heavily on manager selection, whereas asset allocation, they say, has a far greater effect on investment returns. The FCA speculated that it may be that trustees find it difficult to challenge their consultants on asset allocation advice but can provide input into manager selection.

Trustees should ensure that they are spending their time looking at pension scheme investment productively and effectively. It may be worth trustees considering how they spend their time and whether sufficient time is devoted to assessing and challenging advice on strategic asset allocation.

Do trustees have processes in place to assess consultant performance?

A large part of the study looks at the role of investment consultants and the effect of consultants on outcomes for institutional investors (see chapter 8). However, within the chapter, the FCA looks at whether clients monitor the services provided by consultants. The FCA notes that a key area missing from decision making around the choice of investment consultants is an emphasis on performance because the FCA found there is limited information available to institutional investors to assess the quality or performance of advice. The FCA notes the difficulty in finding comparators and without one, “the investor cannot determine if they could have done better elsewhere with another consultant or asset allocation strategy”.

The study serves as a reminder to trustees to consider what processes they have in place to assess the performance of their investment consultant and to consider whether it is effective in assessing the actual quality and performance of the advice received. The study acknowledges the difficulty in making this assessment, but trustees should, at a minimum, be considering what they do to ensure that there is some periodic assessment.


The FCA Interim Report is very long and detailed and covers areas that may not be of direct interest to pension scheme trustees. However, chapters 4 and 8 contain some findings that are likely to be relevant to most trustees and which, at least, should give trustees pause to look at their processes and practices in relation to investment. Trustees may also benefit from looking at the findings on the way retail investors make investment choices and to speak with their benefit consultants or investment providers to ensure that the communications are as effective as possible.

The Interim Report does not provide solutions or answers, but it does give trustees insight into practices that may be sub-optimal and this gives trustees an opportunity to look at their practices and consider improvements if necessary.

Eversheds Sutherland has a lot of experience assisting trustees with governance and best practice. Our specialist Pensions Financial Services team can assist trustees with pension scheme investment matters and our specialist corporate governance team can work with trustees to ensure their processes reflect best practice.