Pension funds will be required to run a competitive tender when choosing their first fiduciary manager to increase competition within the market, the Competition and Markets Authority has proposed.

The recommendation is part of a number of proposals made to reform the pension investment consultancy market, but the CMA has avoided breaking up the market. In September last year, it was revealed that the Financial Conduct Authority, for the first time, used its power to make a Market Investigation Reference to the CMA as it believes certain features of the market prevent, restrict or distort competition.

Publishing its interim report today, 18 July 2018, the CMA has identified a number of competition problems within the investment consultancy, and fiduciary management markets. For example, around half of pension schemes choose the same provider for fiduciary management that they use for investment consultancy. Their current investment consultant can steer them to do this. This means companies, which offer both services, have an advantage over other firms when it comes to getting this business from existing clients.

A number of pension trustees have low levels of engagement with providers in the sector when choosing their first fiduciary manager. The CMA found that just a third of trustees ask firms to compete for their business through a tender process, meaning no competitive pressure is put on their existing investment consultant or fiduciary manager to offer the best terms or highest performance.

Furthermore, the CMA said pensions trustees often do not have sufficient information on the fees or quality of these services to be able to judge if they’re getting a good deal from their existing investment consultant or fiduciary manager, or if they could do better elsewhere.

As a result, the CMA has proposed that a competitive tender must be run for firms selecting their first fiduciary manager. Trustees who have already appointed a fiduciary manager without doing this must also put the role out to tender within five years. The CMA believes this would increase competition in the market and reduce the competitive advantage held by the incumbent investment consultant when it comes to getting the new business.

In addition, fiduciary management firms must provide clearer information on fees and how they have performed for other clients, so that pension trustees have the information they need to make meaningful comparisons between different providers. The CMA is also making recommendations for new guidance from The Pensions Regulator, which would provide trustees with more advice on how to choose and scrutinise providers. It is also proposing that the government broadens the FCA regulatory scope, to ensure greater oversight of the industry.

Commenting, CMA investment consultants market investigation chair John Wotton said: “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. 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.

“This is an extremely important sector that influences how well millions of people’s pension savings are invested, and it’s therefore vital we take steps to make sure that competition is working properly. That’s why we’re proposing a number of important reforms to the sector, including requiring pension trustees to run a competitive tender when they choose a fiduciary manager and ensuring that trustees have much better information about fees and investment performance.”

The CMA is inviting feedback on the provisional decision report by 24 August 2018. The statutory deadline for the CMA’s final report is 13 March 2019.

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