Moving to Fiduciary / Delegated Investment Model

May 2021

Context

A global manufacturer and supplier of lighting solutions had a mature Defined Benefit scheme with £250M assets but with a deficit on a 30 year recovery plan supported by a weak sponsor. In such a context, there was an imperative for investment returns to help bridge any shortfall in deficit reduction contributions.

The Challenge

The trustee board was a mix of member nominated, employer nominated trustees and ITS as an independent trustee. The composition presented a very diverse range of abilities with ITS as the only professional trustee in situ. Historically, the board had struggled with investment related decisions, for example, when considering hedge funds, the board required training on hedge funds before being in a position to consider appropriate selection which meant a considerable timing lag between consideration of change and implementation of change.

Our Approach

We identified that to enable a more efficient approach to investment decisions, it was in the interests of the trustee board and the members of the scheme to move to a delegated model. Initially, we suggested delegation of alternative investments to a 3rd party. The Trustee Board agreed this concept in principle but on further consideration such a move was deemed expensive. It was critical that not only were investment decisions made correctly and at speed but also cost-effectively. However, having gained agreement to the concept of delegation for alternative investments, our question to the board was “if it’s ok for alternative investments why not all forms of investment?”

We identified 4 Fiduciary Management oversight firms, with 2 ultimately being discounted on suitability of their proposed models and fees. The firm selected provided a robust qualitative model based on the trustees’ investment beliefs around core issues such as active management, passive management, derivatives etc. This helped narrow a long list of investment managers to a shortlist of 3 potential investment managers, including the incumbent investment consultancy. The trustee wanted reassurance that all firms had a very solid risk management approach but each of the firms had a different approach to this principle e.g. on diversification, mitigation of the impact of major events, hedging strategies etc.

A key challenge was that the trustee struggled with the different concepts of risk management and were more swayed by the individual personalities representing the short-listed firms. We brought objectivity and a wider market perspective to the process and helped to educate the trustees around why they were doing this, why , so that the process was not put into “the too difficult box” and therefore stopped. From the outset, we encouraged concerns to be raised, addressed issues arising, involved the sponsor at each stage and ensured a good relationship throughout with the Chair of Trustees.

The Outcomes

The appointment moved from the incumbent investment consultant’s firm to a new provider. Whilst the new firm was more expensive than other bidders, they appointed investment managers who were best in class and provided a reasonable, but not excessive, amount of diversification with a clear risk strategy overlay.

Corporate sole trustee case study by: Dinesh Visavadia

DOWNLOAD OUR Moving to Fiduciary/
Delegated Investment Model CASE STUDY

GET IN TOUCH