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November 2020isio.comIsio UK FiduciaryManagementSurvey 2020Document classification: Public1Document classification: Public Isio Group Limited/Isio Services Limited 2020. All rights reserved.

Snapshot of the fiduciarymanagement market 2020 –calm before the storm?Any conversation regarding 2020 is incomplete without mentioning the impact of the pandemic. Thepast year has undoubtedly tested fiduciary managers’ resilience. It has shone a light on the benefitsof this approach to managing investment strategy, but exaggerated weaknesses too. The pandemichas unsurprisingly been a distraction which slowed activity in the first part of 2020, and with the June2021 deadline looming for the CMA Order, we can only believe that there is a lot of activity to come inthe next 12 months. If anything, this pandemic has highlighted the need of independent oversight offiduciary mandates and how Trustees can objectively assess the value added by fiduciary managers.Despite the challenges faced by the industry, we are seeing many positive developments cometo fruition including lower fees paid by clients and greater focus on ESG in the industry. Withapproximately 19%1 of all UK DB pension schemes now using some form of fiduciary management,it would be fantastic for this part of the industry to make a positive impact and lead the way for ESG(and other such) initiatives!Key messages1. Market growth is lower but there has been significant increase in assetsunder management over last year.See more onpage 32. Retender activity has kept managers busy with several mandates changinghands. Given the current trend experienced over this past year, we expect alot more retenders to come through in next year’s survey.See more onpage 43. Fiduciary management fees have decreased over time as cost transparencyand cost awareness has put downward pressure on the fees. However,with greater assets under management, this market is still a big source ofrevenue for fiduciary managers.See more onpage 74. There has been an increased focus on more bespoke ESG policies, whichreflects how Trustees are thinking about this. We expect this trend tocontinue over coming years.See more onpage 61 Number of defined benefit schemes using full and partial fiduciary management compared to the numberof UK schemes in the PPF Purple Book 2019, which listed 5,436 eligible UK Defined Benefit Schemes.Document classification: Public Isio Group Limited/Isio Services Limited 2020. All rights reserved.2

Market updateGrowth slows but remains buoyantThis year saw a c.7% increase in thenumber of total mandates, which islower than the 10% increase from theprevious year. This might suggesta slower pace to implementingmandatesasnewtenderingrequirements are embedded intothe market on the back of the CMAOrder. The lower rate of increase alsoreflects the impact of COVID-19 in thefirst half of 2020. It will be interestingto see how this trend continues intonext year.Growth in number of mandates1200100071280066260040020028402008 2009 201020112012 2013 2014 2015 2016 2017 2018 2019 2020PartialThe assets under management(‘AUM’) have increased by 15% overthe last year driven particularly bygrowth in full fiduciary assets of 19%.Full fiduciary mandate assets havebeen supported by the relatively highlevels of liability hedging that fiduciarymandates are targeting, which havebenefitted from yield movements.Partial mandates continued toincrease, albeit at a slower rate overthe year.303FullGrowth in assets under management 250bn 200bn136 150bn115 100bn 50bn 0bn2008 2009 2010572011612012 2013 2014 2015 2016 2017 2018 2019 2020PartialFullThe Investment Managers and Specialists have experienced higher growth rates, both in terms of number of mandatesand AUM, relative to Consultants (who continue to dominate the market). Could this be a move towards levelling of thedistribution across providers?Footnote: We have assumed JLT data has remained constant from 2018, as following merger with Mercer this data was not available this year.Document classification: Public Isio Group Limited/Isio Services Limited 2020. All rights reserved.3

Retender activityRetender activity increases as impact ofthe CMA review feeds throughFollowing the CMA review, we expected to see a flurry of retender activity over the period. This has been true but perhapsto a more subdued extent than anticipated. What is not captured in our figures is whether trustees are undertaking thisbecause they have to – as a tick box exercise – or are they genuinely considering a change in fiduciary manger?Perhaps as expected, most trustees (around 2/3rds) are deciding not to switch providers following completion of theexercise. However, a significant 36% of the retenders are not being won by the incumbent fiduciary manager. Clearly notall Trustees have been satisfied with the service provided by the incumbent manager since their appointment. Early signs,picked up by our survey, indicate that a larger than expected proportion have opted to part ways with their incumbent.In our view this demonstrates, not thatthe fiduciaries aren’t doing a goodenough job, but more that trusteesare taking their reviews seriously –they are committed to making surethey get the best possible outcomefor their scheme.Retender wins activity252015141058210Full FMPartialRetenders wins where not incumbentRetenders wins where incumbent‘According to our estimate thenumber of retenders capturedwithin this survey is still below halfof all retenders expected under theCMA review.’Footnote: The above data excludes two fiduciary managers who werenot able to provide the above data.Document classification: Public Isio Group Limited/Isio Services Limited 2020. All rights reserved.4

Independent adviceUse of independent advice hasincreased in selectionThere has been a marked increase in the use of independent advice when selecting a fiduciary manager. With 71% usingindependent evaluators to help with their selection exercises (a 16% increase on last year’s survey), this has become animportant oversight for trustees and again maybe unsurprising given the CMA Order. The use of independent advice forongoing monitoring has continued to remain at around 22%. We would expect this to increase going forwards, as we seemany Trustees experiencing the benefits of oversight as part of their selection/retender exercises.Use of independent advice in selection exercises100%80%60%71%61%40%20%0%20192020Use of independent advice in ongoing oversight100%80%‘The COVID 19 pandemichas highlighted the need forindependent oversight offiduciary managers. Currentlevels of ongoing oversightare low; Trustees shouldconsider involving We define independent advice as written advice provided to the Trustees from a third party.Document classification: Public Isio Group Limited/Isio Services Limited 2020. All rights reserved.5

ESG and diversityESG engagement remains high with amove to more bespoke policiesThe Department for Work and Pensions (“DWP”) requirements in relation to Statement of Investment Principles and ESGcame in to force over this year. Similar to last year the level of engagement with ESG issues was high, with c.98% of clientsfocusing on this to some extent over the year. That said, more trustees are using bespoke policies (i.e. screening certaininvestments), around 15%, relative to a negligible amount last year.201910%20201% 2%15%2%No engagementEngage with you on yourspecific ESG policies11%Define general ESGpolicies and objectiveswithin your investmentguidelines72%87%This year we have also focused ondiversity within fiduciary managers.We were keen to understand thekey areas that providers wereimplementing to recognise, promote,or improve diversity. Two key areasfocused on the employees namelyemployee initiatives (e.g. gender paygap) and training.Use a bespoke ESGpolicy (i.e. screeningcertain investments)1612840Schemes to improveBoard or seniorleadership diversityEmployeeinitiatives(i.e. gender pay gap)Changes tofirmwide valuesEmployee trainingprogramme ondiversityOtherDocument classification: Public Isio Group Limited/Isio Services Limited 2020. All rights reserved.6

Asset allocation and feesBest ideas portfolios access more diverseassets, albeit for higher feeWe asked fiduciary managersto tell us how they wouldinvest the assets of a schemewith 500m of assetstargeting a return of Gilts 3% per annum. The averageof responses is set out to theright.2020 – cost effective growth portfolio2020 – best ideas growth portfolioPassive17.4%Property5.8%Property7.4%Less atives28.9%Active66.2%Factor16.8%More equityLess alternativesPassive38.9%Less uciary managers have the flexibility to use a bestideas or cost effective portfolios, although it will beone of these approaches typically implementedfor the client as appropriate. As shown to the right,best ideas growth portfolios provide more activemanagement with less equity exposure and a higherfocus towards alternative assets, albeit for higherinvestment management fees (see below). Thedifference between the average estimated fees ofthe two options is 0.19% (for a scheme of AUM of 500m this equates to 950k p.a.). The levels ofinterest rate and inflation protection remain high onunconstrained portfolios.Fiduciary management fees drop rapidly withincrease in assets under management, but thereduction slows down after 500m. The level offiduciary management fees has reduced over the lastfew years.Equity42.9%Factor 24.8%Average best ideas fees vs average cost effective fees0.50%0.40%0.30%EstimatedExternalmanager fee0.12%EstimatedIn-housemanager fee0.08%0.10%0.20%0.10%Estimatedother fees& expenses0.03%0.24%0.13%0.00%Best ideasCost effectiveAverage FM fee by AUM0.30%0.28%0.20%0.20%0.16%0.12%0.10%0.10%0.00% 100m 100m to 250m 250m to 500m 500m to 1bn 1bnDocument classification: Public Isio Group Limited/Isio Services Limited 2020. All rights reserved.7