Pensions | Competition in the investment consultancy and fiduciary management markets: the CMA's final order

In December 2018, we reported that the Competition and Markets Authority had published a final decision in its investigation into competition in the investment consultancy and fiduciary management markets. In the final decision, the CMA identified a number of factors that adversely affect competition in these markets and confirmed that it would impose a series of remedies. Some of the remedies would be implemented by an order, and some were in the form of recommendations to the Pensions Regulator, the Department for Work and Pensions and the Financial Conduct Authority. On 10 June 2019, following a consultation earlier this year, the CMA made its final order and issued an accompanying explanatory note.

What does the CMA's final order say about Fiduciary Management Services?

The final order contains a number of provisions designed to ensure that, in any case where 20% or more of a pension scheme's assets are being managed by a Fiduciary Management Provider or Providers, the Provider(s) will have been appointed following a competitive tender with at least three unrelated candidates.

Tenders can be open or closed and there are various permutations that trigger the need to run a competitive tender. The requirement applies:

• Where trustees are going to appoint a Fiduciary Management Provider (or Providers) for the first time in relation to a total of 20% or more of the scheme's assets. The trustees will need to run a competitive tender before making any appointment.
• Where trustees have already appointed a Fiduciary Management Provider (or Providers) in relation to a total of 20% or more of the scheme's assets. The trustees will need to run a competitive tender within five years of the date of the first appointment. If this five year period has already passed, or will expire in the next two years, the trustees will need to run a competitive tender within the next two years.
• Where trustees have appointed a Fiduciary Management Provider (or Providers) in relation to less than 20% of the scheme's assets without conducting a competitive tender and want to make a new appointment or increase the level of assets under management such that, in total, 20% or more of the scheme's assets will be subject to fiduciary management. The trustees will need to carry out a competitive tender in relation to all of the scheme assets which will be subject to fiduciary management (not just the additional slice of assets).
• Where trustees have appointed a Fiduciary Management Provider (or Providers) in relation to less than 20% of the scheme's assets after conducting a competitive tender(s) and want to make a new appointment or increase the level of assets under management such that, in total, 20% or more of the scheme's assets will be subject to fiduciary management. The trustees will need to carry out a competitive tender in relation to the additional slice of assets.
• Where trustees have appointed a Fiduciary Management Provider (or Providers) in relation to less than 20% of the scheme's assets after conducting a competitive tender in relation to some (but not all) of those assets and want to make a new appointment or increase the level of assets under management such that, in total, 20% or more of the scheme's assets will be subject to fiduciary management. The trustees will need to carry out a competitive tender in relation to all of the scheme assets for which a competitive tender has not been run (that is, the additional slice of assets and the assets that were put under management without a competitive tender being run).

The final order also sets out the detail of new requirements to provide certain information:

• Firms (or connected firms) that offer investment consultancy and fiduciary management services will be required to put any marketing material for fiduciary management services into a separate document. That document must include prescribed wording to flag the fact that it is marketing material and to remind trustees of the duty to hold a competitive tender. This separation is intended to help trustees to "better understand whether information on Fiduciary Management Services received from an Investment Consultancy Provider is advice or Marketing Material";
• Fiduciary Management Providers who are involved in a tender will be required to provide prescribed information on costs and charges to the trustees, including potential costs if the trustees later decide to change Provider or move away from fiduciary management. This will help trustees to "better understand the costs to be charged by Fiduciary Management Providers prior to deciding to award a contract…" and ensure that "information on costs and charges … [will be] … consistent and comparable across bids in a tender process … [allowing trustees] … accurately to assess the cost of competing offers";
• Fiduciary Management Providers will be required to send a detailed and "clearly itemised" fee statement to each existing trustee client "on a regular basis and at least annually", in order to help trustees "to monitor both the overall costs and charges paid for the Fiduciary Management Services provided to them and the costs and charges paid for the key distinct underlying elements". The explanatory note says that "the presentation of [this] information would ideally follow the user templates prepared by the Costs Transparency Initiative".
• Fiduciary Management Providers will be required to use a standard method and template when they provide potential trustee clients with information about the past investment performance of their fiduciary management service. This requirement would apply, for example, to tender submissions and marketing communications. It is intended to improve "transparency of, and comparability between, the performance information provided by alternative Fiduciary Management Providers, thereby enabling … [trustees] … to drive competition between" providers. The standard method and template are due to be developed in the next six months.
• Fiduciary Management Providers will be required to follow a standard approach when they are providing the past performance of and comparing investments they recommend to a potential client, for example in a tender or marketing materials. This will help trustees to "assess the value for money offered by alternative … Providers … and the quality of the advice received". The explanatory note says that the CMA also expects Providers to follow the same approach when providing past performance information to existing clients.

What does the CMA's final order say about Investment Consultancy Services?

The final order introduces two requirements which will affect trustees who receive Investment Consultancy Services. These are for:

• Trustees to set 'Strategic Objectives' for Investment Consultancy Providers (investment consultants). This requirement will apply to new and existing appointments and is intended to help trustees to "better monitor the performance of their Investment Consultancy Provider". The Strategic Objectives should "include a clear definition of the outcome expected to be delivered and the timescale over which it would be delivered". They should also be "closely linked to the scheme's investment objectives in most cases … [and]… will need to be reviewed at least every three years and after any significant change to the scheme's investment strategy and objectives". Trustees will also need to "ask their Investment Consultancy Providers to report … on their performance in meeting the" objectives.
• Investment Consultancy Providers to follow a standard approach when they are providing the past performance of and comparing investments they recommend to a potential client, for example in a tender or marketing materials. This will help trustees to "assess the value for money offered by alternative … Providers … and the quality of the advice received". The explanatory note says that the CMA also expects Providers to follow the same approach when providing past performance information to existing clients.

When will the new rules start to apply?

Most of the new requirements discussed above will start to apply at the beginning of December 2019, being six months after the date of the CMA's final order. The exception is the standard method and template for Fiduciary Management Providers to use when providing potential trustee clients with information about the past performance of their fiduciary management service. Here, the expectation is that the standard method and template will be developed in the next six months, with a view to it being available for use after that.

Will pension scheme trustees have to report on their compliance?

Pension scheme trustees will have to send an annual statement to the CMA to confirm that they are complying with the parts of the CMA's final order that apply to them. The first compliance statement will need to reach the CMA within twelve months and four weeks of the relevant requirements coming into force. In practice, this means that trustees are likely to need to prepare their first statement in December 2020. The annual compliance statements will usually need to be signed by the chair.

Fiduciary Management and Investment Consultancy providers will also have to prepare annual compliance statements.

What will happen if pension scheme trustees do not comply with the CMA's final order?

If pension scheme trustees do not comply with the parts of the CMA's final order that apply to them, then they will need to make a report to the CMA within fourteen days of becoming aware, and confirm what they are doing to achieve compliance.

Trustees who don't comply could also face action by the CMA and/or claims from members.

Will there be any guidance to help trustees to comply?

Yes. In the next few months, the Pensions Regulator should finalise guidance for trustees on, for example, competitive tendering (including "the information that [trustees] should provide … in order to obtain meaningful estimates of costs and charges") and setting and monitoring strategic objectives for investment consultants.

Osborne Clarke comment

The CMA's final order will be relevant to nearly all pension scheme trustees. Not all schemes appoint a fiduciary manager. However, trustees who have appointed one, or are thinking about appointing one, need to take note of the new requirements and start to think about how they will comply with the competitive tendering requirement. Many more schemes will have an investment consultant. The trustees of these schemes need to start to think about how they will comply with the requirement to set strategic objectives.

We anticipate that the Pensions Regulator will soon release draft guidance on running a competitive tender and setting strategic objectives. This should be helpful. However, trustees may also wish to take legal advice on the new requirements. For example, the CMA's final order and explanatory note contain important details about the competitive tendering requirement, including the dates on which the 20% threshold must be applied and the assets that trustees must take into account when deciding whether the threshold has been reached. Trustees might also want help with deciding which requirements apply to or affect them, and/or to have some help with making their annual declaration of compliance to the CMA.