PLSA backs CMA investigation of investment consultants

The PLSA said there need to be a comprehensive solution

The Pensions and Lifetime Savings Association (PLSA) has urged the Financial Conduct Authority (FCA) to refer the investment consulting market for a competition investigation.

The trade body has told the FCA that its members have concerns about the transparency and alignment of interests within the investment consultancy market, and that some schemes do not have the resource or budget to challenge advice they have been given.

This then has an impact on trustees’ ability to negotiate fees, scrutinise performance, manage risks, and push back on consultants’ potential conflicts of interest, where they also provide fiduciary management services, it argued.

This follows the FCA’s asset management market study final report, published in June, which provisionally set out plans to reject undertakings in lieu (UIL) of a competition investigation put forward by the big three consultancies, who occupy approximately 57% of the market: Aon Hewitt, Mercer, and Willis Towers Watson.

The UIL included a commitment to improve tendering processes, transparency of performance and costs, and limit the possibility of conflict of interests.

However, the FCA said the UIL did not far enough and would not allow it to undertake a wider and more comprehensive market review, and revealed its provisional decision to recommend the market to the Competition and Markets Authority (CMA) for an investigation.

The PLSA agreed with the FCA’s views, and argued in particular “there is insufficient market coverage or detail within the UIL for it to provide a truly comprehensive solution” and “a CMA investigation could probe these competition in greater depth and could recommend, if necessary, structural remedies to the sector”.

The trade body’s investment and defined benefit policy lead Caroline Escott said a referral to the CMA would be in members’ interests.

“Investment consultants can play a positive role in the institutional investment chain, adding value for institutional investors and scheme members,” she said. “However, although some PLSA members have said they are happy with the services offered by their consultants, others have consistently expressed their concerns about the potential misalignment of incentives in the industry.

“The UIL contained many welcome commitments to addressing the issues highlighted by the FCA as part of its market study. Nonetheless, we believe there is insufficient market coverage or detail within the UIL for it to provide a truly comprehensive solution. We would therefore support a referral to the CMA and hope such a step would ensure a market which works in the best interests of pension schemes and their members.”

The PLSA also supported the FCA’s recommendation that the market be brought under its regulatory remit, “particularly in the area of asset allocation advice”.

The FCA’s recommendation was also endorsed by Cardano, which called for investment consultants to be required to set clear and measurable objectives, and for fiduciary managers and investment consultants to express track records as a change in their clients’ solvency ratios after fees and deficit repair contributions.

It also said The Pensions Regulator (TPR) should provide clear guidance on how to identify and select investment consultants and fiduciary managers, while trust-based schemes should adopt a corporate-style governance structure.

Cardano co-head of clients Richard Dowell said a holistic approach needed to be taken to reform the market, including input from the FCA, CMA, TPR and the Department for Work and Pensions.

“The FCA’s asset management market review has made a significant contribution to our understanding of what works and what doesn’t in the market,” he said.

“We welcome the conclusions of the study, but believe more work needs to be done across different government agencies to create a vibrant and competitive market that works in the interests of defined benefit (DB) pension schemes and their members.

“With this in mind, we agree that the UIL presented by the three largest providers should be rejected, and a market investigation reference should be made to the CMA.”

Cardano added this “is what is required to create better outcomes for DB pension schemes and retirement security for their members”.

The FCA’s consultation on whether to reject the UIL and refer the market to the CMA closed on 26 July, with a final decision expected by the end of September.

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