fiduciary management

Why Pensions Rarely Sue Their Consultants, Managers

The UK’s British Coal Staff Superannuation Scheme has filed a lawsuit against consultant Towers Watson for investment losses stemming from allegedly “negligent investment consulting advice”.

These types of lawsuits – a pension fund suing their consultant or investment manager – are rare. Christian Toms, a lawyer who worked with a Dutch pension fund that sued its investment firm (Goldman Sachs) in 2012, explains why these situations are so rare.

From the Tally:

Why are these kinds of legal actions, where pension funds sue their investment consultants or fund managers, so rare?

Pension funds tend to look at legal actions in a different way to hedge funds or investment banks. They are very cautious about spending a lot of their members’ money pursuing something that’s not a ‘safe bet’. For this reason, the cases we see tend already to have a lot of meat to them – a clear failure to invest in a particular way that was promised, or a complex investment that was not right for the client.

Does the argument that investment is always risky, and investors should be aware they can lose their money, make these cases inherently harder to bring?

One of the big issues is this ‘hindsight’ argument. The focus of a legal case always has to be on what was going on at the time. Did the investment manager do enough due diligence on the investment? Did they properly understand the risks, and what the clients’ risk profile was? Would a reasonable manager have done what the investment firm did in this case?

This is particularly relevant for pension funds as they are not necessarily the most aggressive investors in the world, and if they end up in a riskier structure or a more complex investment than was necessary, that could give you grounds for an argument.

Toms also talks about the possibility that we could see more of these lawsuits:

Fiduciary management is a growth area in the industry. Could this lead to more disputes of this kind?

We are seeing this more and more. Consultants are taking on more asset management responsibilities. But even if they aren’t, there may still be grounds – a duty of care in relation to the advice given, perhaps. Was the advice appropriate?

In the Towers Watson/British Coal case, if they were specifically asked to implement a currency hedging strategy, it may be a question of what was appropriate. What was the need at the time and what did they do? Was what they did what a reasonable manager would do?

Generally, with pension funds, I’d say it would do all of them a benefit to more closely scrutinize their investment firms when something has gone wrong, rather than just saying ‘oh well, that’s life, it’s unfortunate, let’s fire the asset manager and move on’.

Read the full interview here.

Photo by Joe Gratz via Flickr CC License

Study: Pension Trustees Spend Less Than 5 Hours Per Quarter Evaluating Investment Decisions

Survey results recently released by Aon Hewitt reveal that most pension trustees in the UK only spend about five hours each quarter evaluating investment decisions. The survey did find, however, that trustees were spending more time on investment evaluation in 2014 than they did in 2013.

From Investment and Pensions Europe:

Pension boards and trustees are opting for fiduciary management because they can often only spend five hours each quarter scrutinising investment decisions, according to Aon Hewitt.

The consultancy said the increasing complexity of investment decisions was driving those in charge of pension assets into the arms of fiduciary managers, but that only one-quarter of those using such providers were employing indices to measure successful performance.

Drawing on the results of a UK survey of nearly 360 investors worth £269bn (€344bn), the Aon Hewitt Germany’s head of investment consulting Thorsten Köpke said the questions facing UK investors were also relevant concerns for their German counterparts.

The survey also found that 73% of pension boards and trustees were only spending five hours a quarter on investment decisions, a 10-percentage-point increase over the 2013 survey results – meaning they placed significant trust in managers to monitor investments, according to the consultancy.

However, interest in fiduciary management was largely dependant on the size of a fund’s portfolio, the survey found.

It also found that those managing more than £1bn in assets were more inclined to delegate responsibility for only part of their portfolio, while those with less than £500m in assets delegated the entire portfolio.

Köpke added: “The last few years have seen occupational schemes in Germany as in England – both small and medium-sized ones – work with fiduciary managers.”

The data came from Aon Hewitt’s Fiduciary Management Survey 2014.

Survey: 88% of Pension Funds Prefer Hiring Firms They’ve Already Worked With

A recent survey from consulting firm Aon Hewitt suggests that pension funds looking to hire consultants or outsource investment management duties will overwhelmingly consider firms they’ve already worked with over those they haven’t.

This survey comes from Britain—but it’s a safe bet that funds in the U.S. behave similarly.

Reported by Financial News:

Pension funds that are contemplating bringing in a fiduciary manager – a single firm to take on most, if not all, active investment responsibilities – are overwhelmingly more likely to employ a firm they already know rather than a newcomer, a survey for consultancy Aon Hewitt suggests.

Only 12% of 125 funds said they would bring in a firm they did not already employ.

In choosing among firms that already worked for them, 59% would go for their consultant and 30% for a fund manager.

[…]

Sion Cole, head of client solutions at Aon Hewitt, who is responsible for its £6.2 billion fiduciary business, said: “Fiduciary management has to be built on a level of trust. What we’re seeing is that pension trustees are going out to market, assessing their options and then appointing someone they know and trust to do that job.”