Call for formal due diligence around fiduciary appointments

Pension_old_woman_410A consultancy and a law firm have questioned whether pension fund trustees should be legally obliged to go through a formal due diligence process when making significant changes in investment approach.

Muse Advisory, a pensions consulting firm specialising in governance, and law firm Wragge & Co have joined forces to raise questions over pension scheme trustees’ approach to investment.

One of the circumstances where it may be necessary for thorough due diligence on behalf of pension trustees is the appointment of a fiduciary manager, the two firms said.

Mark Hodgkinson, director at Muse Advisory, said: “Over the last few years we’ve been surprised to see firms converting their traditional consultancy clients to fiduciary management with seemingly little due diligence on the part of the pension fund trustees.

“Trustees need to project forwards four or five years and ask themselves what they will do if fiduciary management hasn’t worked out the way they anticipated. Maybe it is time to question whether trustees should conduct a thorough due diligence process when outsourcing the implementation of their investment strategy to a fiduciary manager, implemented consultant or whatever else term they may use to describe their firm’s service.”

Paul Feathers, a partner in Wragge & Co’s pension team, said: “We have advised numerous trustees in relation to fiduciary management mandates....the position is complicated because trustees frequently have to rely on consultancy advice in relation to such appointments from either the fiduciary manager itself or a related company. This raises a serious risk of conflicts.

"Trustees must be able to demonstrate that they have taken proportionate steps to manage any such conflict, which can often mean undertaking their own due diligence process. If trustees don’t get their governance right at the outset, there is a risk that they could find themselves personally liable further down the line if things don’t work out as they expected.”