U.K. pension plan trustees seeking to delegate investment decisions face new rules starting Dec. 10 that will require them to carry out competitive tendering before selecting a fiduciary manager to invest 20% or more of the plan's assets.
The rules apply not only to new appointments but to a plan's existing managers if they haven't been hired through a competitive bid.
The new Competition and Market Authority's requirements are expected to result in a glut of new tenders, which is likely to substantially outpace recent levels, said Pieter Steyn, London-based head of delegated investment services U.K. at Willis Towers Watson PLC.
According to the annual 2019 KPMG U.K. fiduciary management survey, released last month, mandates for full fiduciary management increased by 55 to 662 through the year ended June 30, 2019, up from 607 for the same period a year earlier.
Some 17% of 5,450 U.K. defined benefit plans used fiduciary managers as of June 30, about 80 more than in 2018, KPMG's latest survey showed. Assets under fiduciary management total £172 billion ($220 billion) now, up from £59 billion five years ago.
But the CMA ruling could see an additional 200 competitive bids between December 2019 and July 2021, Mr. Steyn said.
The rapid increase in new tenders will be a result of plans that already have a fiduciary manager in place having to enter into a bidding process, he added.
If a plan did not use a competitive tendering process to appoint that manager, it will need to retender the mandate within five years of the manager having been appointed, said Ian Cormican, London-based partner at law firm Sackers & Partners LLP.
And if the five years since the initial appointment have already expired, or will expire within two years of June 10, 2019, then the tender has to be run by June 9, 2021, he added.
These new rules are the culmi- nation of the U.K.'s CMA review, which began in 2017, of the investment consultancy and fiduciary management sector.
It was prompted by competition concerns within both the investment consultancy and — to a greater degree — the fiduciary management market, the CMA said. Many appointed fiduciary managers had previously been advisory consultants for the same pension plan.
But only a third of pension plan trustees had asked fiduciary managers to compete for the business through a tender, the CMA said in December 2018.
"This, arguably, gave those firms an unfair advantage in those mandates," Mr. Cormican said.
The CMA also said many trustees did not have sufficient information about fees or the quality of investment consultancy and fiduciary management to be able to judge if they were getting a good deal.
The legally binding CMA order is expected to create challenges for trustees, who will need to invite and use "reasonable endeavors" to obtain written proposals from three independent fiduciary managers.
Steve Balmont, a London-based professional independent pension trustee at independent pension trustee firm BESTrustees Ltd., said: "Carrying out a competitive tender is not cost free."
Expenses will be incurred by the plan, the sponsoring employer, responding fiduciary managers, Mr. Balmont said, and these costs also potentially include advisory charges incurred to help them run the bid.
"The typical scheme using a fiduciary manager only has a couple of hundred million pounds in assets and for smaller pension schemes, the time and costs of retendering could be quite significant," Mr. Balmont said.
It's disappointing the various regulatory bodies have not done a more thorough value-for-money appraisal of how much rebidding might cost all pension plans, especially the small plans, he added.
"Schemes will have to pay upfront for retendering while the payback for schemes complying with this process will come over a number of years," Mr. Balmont said.