Experts’ track record of success

The investment strategy of any pension fund is designed to generate sufficient returns to meet the benefit payments of pensioners. However, most defined benefit (DB) pension schemes are running in deficit after 15 years of volatile market conditions. Companies face the challenge of improving funding levels while also controlling risks which may increase the deficit further.

Though a relatively new concept in pension scheme investing, fiduciary management has gained steady ground over the last five years. It makes provision for those responsible for a pension scheme, be they trustees, a governance board or the employer, effectively to outsource the day- to-day running of the scheme’s investments. This allows trustees and the employer to spend more time on the strategic decisions, which have the greatest impact on overall returns, and on running their business.

Schemes may use fiduciary management to outsource the manager selection of a segment of the portfolio, to help diversify away from equity risk, build a diversified portfolio of return-seeking assets or to construct and implement a portfolio to control liability risks.

A fiduciary manager may also be used to tailor a completely delegated governance framework to help schemes lock in market gains and react quickly to market conditions. This is often done as part of a holistic de-risking roadmap that plots the journey for a plan towards reaching the point of being fully funded, while all the time progressively reducing risk in the portfolio.

As funding levels increase – the difference between the money in a pension fund and what it needs to meet the benefits promised to its members – risk is reduced. This reduces the need for additional contributions in the future. This is often referred to as full fiduciary management, and requires both actuarial and investment skills.

The fiduciary management approach adopted by schemes will depend on the available time and resources of the trustees, governance board and employers.


It’s not just a good story either, as the impact of a fiduciary manager has provided enhanced performance compared to the average pension scheme.

Pension schemes using Mercer’s full fiduciary management services have experienced relatively better funding-level progression, with lower volatility, than comparable UK pension schemes.

Take the last year, for example; this has been a particularly tough year for pension schemes.

Since the start of 2014, the fall in the average funding level of FTSE 350 schemes was approximately double that of the average Mercer client using full fiduciary management. Mercer’s full fiduciary clients have also experienced, on average, about 20 per cent less volatility – or risk – in the progression of their funding levels over the same period.

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The Pensions Regulator’s October data also showed that between the end of March and end of September 2014, average scheme funding deteriorated by around 8 per cent, reflecting lower gilt yields. However, over the same period, the funding level of the average Mercer full fiduciary client dropped by around 2 per cent.

Longer-term performance has also been strong. Mercer’s first full fiduciary management client commenced in March 2010. From inception to the end of September 2014, the funding level has been 4.6 per cent better than a comparable average UK pension scheme.


By having experts running the investment portfolio with access to scale, a fiduciary manager may open doors to alternative asset classes for smaller schemes. For example, Mercer’s full fiduciary clients have made allocations to multi-asset credit and private debt over the last year.

A fiduciary approach has allowed many schemes to make significant strides over the past few years in understanding and better managing the risks to which they are exposed. Some have achieved this by diversifying away from equities to find alternative sources of return, while others have built liability-matching portfolios to mitigate the risk that changes in interest rates and expected inflation can have on the value of the liabilities.

By having experts running the investment portfolio with access to scale, a fiduciary manager may open doors to alternative asset classes for smaller schemes

However, few schemes have been able to address longevity risk, the risk of members living longer than anticipated and thereby increasing the total pension payment liabilities. This is because the costs and complexity have made it prohibitive to schemes below £1 billion in assets under management.

Mercer has recently launched a groundbreaking solution – SmartDB – that provides a competitive pensioner longevity risk solution to schemes of all but the smallest sizes. In combination with their fiduciary management services, SmartDB is a viable alternative to a pensioner buy-in contract in the short term and buyout in the longer term.


Fiduciary management has a clear role among DB schemes as they move, however gradually, towards full funding and buyout. However, it has more to offer to pension schemes, even in the new era of defined contribution (DC) and auto-enrolment.

With DC schemes, the member’s fund is very much “what you see is what you get”. As a result, some trustees and employers have been changing the structure of investments in recent years to offer a balance between generating returns and limiting volatility.

The recent changes announced as part of the 2014 Budget have further increased the complexity of DC schemes and more innovative solutions are required which are tailored to the new needs of members.

Fiduciary management is designed for those who want to spend more time running their company than the pension scheme and DC is no different.

Managing pension scheme assets involves many different and complex areas, including investment manager selection, portfolio construction, liability-hedging and de-risking. Whatever the type of pension scheme, whether de-risking a DB fund or constructing an innovative DC investment strategy offering a range of retirement options, fiduciary management can provide improved long-term governance and the opportunity for improved outcomes for your members.