Isio to start rating fiduciary managers on insurance capability

Isio will start rating fiduciary managers on their insurance capabilities from 2024 to reflect the increase in insurance transactions by UK pension funds as an endgame option for schemes. 

Paula Champion, partner and head of fiduciary management oversight at Isio, said the consultancy has observed “considerable differences” in how fiduciary managers incorporate insurance services into their offerings.

Some managers, for example, have demonstrated extensive experience and innovative solutions, providing unique tools and data that help clients achieve their objectives, she said, while pointing out that other newer entrants to the market show potential with emerging capabilities.

She said that the integration of insurance services into fiduciary management is becoming increasingly important, particularly as more schemes approach significant transactions, such as buy-ins and buyouts.

Isio’s 2023 fiduciary management survey showed that circa 18% of all pension schemes using fiduciary management will go through an insurance transaction in the next three years – which it said is a significant number.

Champion continued: “This figure underscores the need for fiduciary managers to have robust and integrated insurance capabilities in place that align with their long-term strategic goals.

“The best approach depends on a manager’s ability to effectively advise clients at the right time, ensuring seamless integration of insurance solutions into their fiduciary management services.”

To reflect this, and meet the evolving needs of clients, Isio has introduced insurance capabilities ratings for its 11 rated managers, which it introduced in its first annual Fiduciary Manager Trends report.

Champion explained that ratings can assess how well these capabilities are integrated into the overall investment services offered by managers. This includes aspects such as journey planning, liability hedging, asset transitions, and monitoring market pricing.

At the moment, according to Isio’s first annual Fiduciary Manager Trends report,  only three out of 11 of its rated managers are market leading in their insurance capability rating. Managers rated as market leading have strong capabilities and experience compared to peers, it explained.

Meanwhile, five managers were rated as market neutral indicating they have some capabilities and experience, but lack differentiators, and three are market lagging, meaning they lack differentiators and experience compared to peers.

Through the new process of evaluating manager insurance services, Isio has uncovered several trends.

One trend, according to Isio, is the experience gap. It pointed out that while there are some managers that have helped many schemes undertake an insurance transaction, some have “little or no experience”.

Isio said that this lack of experience itself is not “necessarily a problem” and can often be explained by managers being relatively new entrants to the fiduciary market and who their clients are. Regardless, Isio said that experience does demonstrate how a manager puts their services into practice and gives credibility to help with a transaction.

Isio also noted that some managers mentioned insurance services that are specific to their business and that their fiduciary clients can benefit from. “Whether it’s sources of insurance data, tools to improve pricing for clients, or tools to reduce cost, our review identified a range of unique offerings,” it said.

Isio has also tested to see whether managers with an in-house insurance team could show how this was integrated into the fiduciary offering. By contrast, those managers without an in-house team highlighted their ability to work with a range of advisers on a transaction. However, Isio said it does not consider either approach to be “best”, and it comes down to the individual manager having a clear process for advising clients at the right time.

Other trends

Elsewhere in the report, Isio said that sustainability is a key theme influencing new ideas being introduced by fiduciary managers over the past year. This, it said, is a reflection that fiduciary managers are treating their stewardship responsibilities seriously and taking action to improve long-term risk management.

The consultancy said it observed three managers introducing ‘flavours’ of infrastructure over the past 12 months, focussing on inflation-linked returns, generating cash flow, and positive ESG credentials.

There was a mix of both listed and unlisted infrastructure options being introduced, and Isio said that pension fund trustees and sponsors should be aware of how much equity linkage there is in proposed allocations, and whether any illiquidity aligns with their scheme objectives.

The report also showed that five out of 11 managers said they were looking to add insurance-linked securities to their portfolios, as insurance premiums “appear attractive”.

Isio said that diversity through alternative assets like this can help managers deliver more stable returns over time. It recommended that trustees and sponsors should check the liquidity terms and the size of the allocation with their manager, as the idea is still “relatively niche”.

Over the last year, three managers introduced options contracts that give managers the right to sell equity at a specified price, which can provide protection should equity markets fall.

Isio pointed out that the idea itself isn’t new, but the timing of its introduction to portfolios can signal that managers are worried about declines in equity values.

It said that fiduciary client portfolios often use equity as a key driver for delivering returns, and this strategy can provide helpful protection if implemented and sized sensibly.

Schemes should check with their manager about the intended timeframe though, as there is often a financial cost to buying this protection, the firm warned. This, it said, can lead to underperformance when equity market values are rallying.

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