British pension schemes are considering dumping their investment consultants after the UK’s financial watchdog warned of far-reaching problems in the powerful industry that advises on £1.6tn of investor assets.
In its study on the asset management industry released in June, the UK’s Financial Conduct Authority said pension funds rarely appear to switch investment consultants despite the sector being rife with opaque fees and conflicts of interest.
In the wake of the report, 19 UK pension schemes plan to re-evaluate their relationship with their existing investment consultant, according to a poll of 35 retirement funds overseeing a collective £42bn of assets.
David Weeks, co-chairman of the Association of Member Nominated Trustees, an industry body, said the FCA’s report was a “wake-up call” for pension fund boards, which were already concerned about rising fees and lacklustre investment returns.
“The results [of the FCA’s investigation] were damning. There was already a feeling there wasn’t enough openness and transparency and this has shone a further spotlight on the [investment consulting] industry,” he said.
“Boards of trustees are taking a new look at [their relationships with investment consultants]. We are conscious that there are potential savings to be made by asking the right questions.”
Investment consultants are hugely influential, providing pension funds and other investors with advice about asset allocation and the best fund mangers to use.
The FCA warned in its report that, on average, investment consultants were unable to identify fund managers that offer better returns for investors, and called for more regulatory powers over the industry. It also said it wants to recommend that the UK’s antitrust body carries out a full-blown competition investigation into the sector, which is dominated by three companies — Aon Hewitt, Willis Towers Watson and Mercer.
Patrick Disney, managing director of the institutional group for Europe, the Middle East and Africa at SEI, the fiduciary manager that carried out the survey, said the FCA’s report “highlighted the inherent conflicts of interest in the investment consulting business model”.
“Our survey clearly indicates that the majority of trustees we polled have become concerned enough about the issues raised in the report to re-evaluate their relationship with their consultant.”
If pension funds were to switch consultants, this would mark a big shift from current practice. The FCA found that at least 74 per cent of the investors it examined had not changed consultant in the past five years.
A trustee of a pension fund, who requested anonymity, said his scheme would review its relationships with its investment consultant over the coming months in light of the FCA report and concerns about costs.
“As one is looking at these depressed levels of returns on any sort of investment, the levels of cost and charges [imposed by investment consultants] assumes a greater importance,” he said.