CMA finds that tendering of FM contracts could lead to reduction of fees of over 20%

The Competition and Markets Authority (CMA) yesterday published a working paper for consultation on additional analysis they have completed in response to feedback received on data published as part of their review of the investment consultant (IC) and fiduciary management (FM) services in the UK.

XPS Pensions Group have always been supportive of the CMA investigation in to IM and FM services and believe it has been a catalyst for trustees and companies to review the services they are receiving and whether it meets their expectations and requirements. Below are their thoughts on the latest working paper, ‘market outcomes: updated results’.

Patrick McCoy, Head of Investment, XPS Pensions Group said: “Tendering is a standard commercial practice which has obvious benefits and the CMA has now shown there to be a real material benefit to tendering and independent oversight. Some of the IC-FMs challenged the CMA over the quality analysis in its July report, we suspect to try to avoid the introduction of the remedy to force mandatory tendering. The CMA redid the analysis and published the results yesterday confirming the material benefit of tendering.

“In the latest analysis the CMA has made a distinction between a “structured bidding process” and a “formal tender”. The conclusion is that a structured bidding process has no discernible impact on fees paid, whereas a formal tender leads, on average, to a reduction in fees of over a 20%. In reality tendering is only common sense. IC-FMs who are challenging the CMA would be better placed supporting the manifestly evident benefits of mandatory tendering to pension schemes, confident that their offering, if most suitable, will be retained by their clients. Tendering will add a minor layer of additional cost, but nothing close to the 50% increase in total cost the CMA has calculated results in switching to FM and is clearly offset by the fee reductions that result from it.”

Patrick continues: “The Dutch market for FM has long been held up as the gold standard for FM, but now the model is being challenged. One MP is suggesting that FMs are banned from providing investment advice to their clients. This may be a step too far for the UK, but we have long held the belief that before appointing an FM, trustees should take independent advice on the setting of their Journey Plan, ie what they are targeting, over what period and with what level of risk and return. We say this because what you are targeting will significantly influence which FM may be the right fit for the trustees. Separating the investment advice and monitoring as suggested by the Dutch MP is, in our view, best market practice.”

Patrick concludes: “The CMA also found that fees can be reduced through tendering but there was not a persistent trend. You can conclude from the CMA’s analysis that trustees should tender their IC contracts more frequently. Not because they will get a reduction in fees, although this might be the case, but because the larger providers provide lower quality and so they would get better advice from switching out of the Big 3 firms. So, we would encourage trustees to use the CMA review as a catalyst to consider whether they are satisfied with the advice they get and if not put the contract out to tender.”

For more information please contact:
Louise Dolan, Partner, Camarco
Tel: 020 3757 4982 / 07446 870025

Rebecca Noonan, Senior Consultant, Camarco
Tel: 020 3757 4981 / 07900 340483