The gatekeepers of the UK’s £1.6tn pension fund industry have avoided a forced break-up of their businesses after the UK’s antitrust body stopped short of recommending a significant overhaul of the investment consultancy sector. But they face increased regulation and mandatory tendering.
The so-called Big Three of Mercer, Willis Towers Watson and Aon had feared they could be forced to spin off either their investment consultancy or fiduciary management businesses — a type of asset management service — after the Competition and Markets Authority launched a probe into the sector last September.
The CMA on Wednesday, however, decided against a break-up, despite warning of an “adverse effect on competition” in the sector that could cause a “material customer detriment”.
The provisional findings mark a significant moment for the institutional advice sector, which has largely flown under the radar of regulators despite advising UK pension funds, insurers and charities on how at least £1.6tn of assets should be invested.
John Wotton, chair of the CMA’s investment consultants market investigation, said the sector was “extremely important” and “influences how well millions of people’s pension savings are invested”.
“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.”
Investment consultants advise trustees on which fund managers to use and which asset classes to invest in. Some retirement funds also outsource investment decisions, in a process known as fiduciary management. According to the CMA, the revenues of fiduciary managers have more than trebled over five years, reaching £255m in 2016.
The rapid growth of investment consultancy and fiduciary management has led to calls in recent years to tackle potential competition problems in the sector. There are fears that big investment consultants push clients to use their lucrative fiduciary management services, leading to calls for companies to be forced to spin off their fiduciary arms.
The CMA found that just 34 per cent of customers buying fiduciary management carry out a formal tender. It also warned that the three largest investment consultancy providers have increased their share of the fiduciary management market rapidly in recent years to about 50 per cent, and said it feared market concentration could increase in the future.
But the competition authority said a forced spin-off would “not be effective or proportionate in addressing the problems we have provisionally found” as companies offering both services would lose economies of scale and costs for providers and prices for customer could rise.
As well as mandatory tenders for first-time fiduciary management, the CMA proposed that companies should include warnings when selling such services. The competition authority also said it would recommend that The Pensions Regulator provides new guidance for pension schemes to help them purchase investment consultancy and fiduciary management.
The CMA has also proposed that most investment consultancy and fiduciary management services be brought under the regulatory perimeter of the Financial Conduct Authority, the UK financial watchdog. The competition authority embarked on its probe after the FCA referred the sector to the CMA because of “serious concerns” about how investment consultants operate last September. It marked the first time the FCA used these powers since they were introduced three years ago.
Sinead Leahy, co-head of pensions investment consulting at PwC, described the CMA’s proposed remedies as a step in the right direction.
“The CMA’s proposal for pension scheme trustees to undertake a competitive tender of their fiduciary manager should lead to greater competition in the market,” she added.
But Nikesh Patel, head of investment strategy at Kempen Capital Management, said that while the proposed remedies would help treat some of the symptoms afflicting the industry, they did not go far enough. “If the CMA is looking for a cure, this medicine is not strong enough,” he said.
Investment consultants and fiduciary managers have been forced to redirect staff and hire external advisers to cope with the 10-month probe. Companies are said have paid millions of pounds in fees to advisers.
“It has been a long two and a half years,” a senior figure at an investment consultancy said of the CMA’s review. “You end up dreaming about it and talking in your sleep about it. I just want it put to bed.”