U.K. Watchdog Shakes Up $2.1 Trillion Pension Manager Market

(Bloomberg) -- The U.K. markets watchdog proposed rules to help pension funds overseeing more than $2 trillion get a better deal from the firms they pay for investment management and advice.

About half of the pension funds use the same consultants for investment advice and fiduciary management, a combination that’s likely to result in higher prices and worse service, the Competition and Markets Authority said in a statement on Wednesday. Some of the biggest fiduciary managers in the U.K., such as Aon Hewitt LLC, Mercer International Inc. and Willis Towers Watson Plc, make investment decisions on behalf of their clients.

“Many pension trustees aren’t shopping around when first moving into fiduciary management,” a service that costs more than investment advice and involves a “significant hand-over of control,” the CMA said. This creates an advantage for firms that offer both services.

The fiduciary-management market has grown tenfold in the last decade, the CMA said. About 13 percent of the funds now use such a service. The CMA began an investigation into the market in September and presented its provisional decisions on Wednesday.

The CMA proposed that pension funds selecting their first fiduciary manager be required to run a competitive tender and ones that have already appointed a manager without a tender be given a prescribed period of time to invite bids for the service. For their part, asset managers have to give clearer information on fees and past performance.

Value for Money

“We’re concerned that pension schemes are not currently putting pressure on the market to get the best value for money on behalf of their members,” said John Wotton, who led the CMA’s investigation. “They may lack the information they need to compare competing offers, and so could be sticking with their existing investment consultant or fiduciary manager when there are better options available.”

The Financial Conduct Authority, which referred the industry to the CMA for “a detailed investigation” because of its competition concerns, said in a statement it welcomes the watchdog’s work. That includes its recommendation that the government widen the FCA’s brief to ensure heightened oversight of the sector.

“We agree with the CMA that it is important that the remedies address the potential harm in this sector effectively,” the FCA said. “The CMA’s provisional findings about pension schemes trustees’ limited ability to drive competition between investment consultants and fiduciary managers are significant.”

Positive Reaction

Goldman Sachs Asset Management said the recommended actions would bring the industry “closer to the standards of transparency already required in asset management.” Willis Towers Watson said separately that while imposing competitive tendering was “in principle a sensible proposal,” it’s concerned about the costs and proportionality, particularly for smaller pension schemes, a view echoed by Aon.

Andy Agathangelou, founding chairman of the Transparency Task Force, called the CMA’s recommendations “sensible” and predicted that in time the industry’s profit margins will suffer and the pace of consolidation will increase.

The CMA’s initiative will “totally transform the market; but it will do so in a gentle and progressive manner,” he said. “This is just the beginning of a process of market reform that is likely to continue for many years to come.”

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