The 7 Habits of highly effective Pension Trustees

Why would anyone want to be a trustee of a pension scheme?

The enormous responsibility, ensuring members are paid what they are entitled to, while navigating an ever more complex and volatile world of investments, liabilities and risk. Throw a limited cost and governance budget into the mix and a thankless task becomes even more difficult. Yet every quarter, thousands of willing men and woman meet to hear from their advisers and industry experts, to make decisions which have repercussions for many years to come. 
The Pensions Regulator refers to this process of decision-making and the implementation of these decisions as the governance structure of a pension scheme, stating that good governance is the “bed-rock” of a well-run scheme. In light of this, we set out what we consider to be the key elements required to ensure good governance, which will result in improved member outcomes.

1. Use the best advisers and tools for your scheme

Every pension scheme is different and the needs of the trustees are different. There are excellent investment consultants, independent trustees, technology solutions and educational resources which can fit your requirements. Don’t settle for an inferior service. Test the market, take time to review what is out there and don’t be afraid to demand excellence and value for money.

2. Identify clear objectives

Ensure at the outset that the objectives of the scheme are clearly articulated, that you have buy-in from all the stakeholders and that what is required is understood by all the trustees and advisers. This should be evidenced in your Statement of Investment Principles (SIP), forming the blueprint for your scheme.

3. Learn from the past

Don’t just accept routine performance and monitoring reports from investment consultants and custodians. The most sophisticated and well-run schemes use “decision based attribution analysis”, where every investment decision can be linked to the returns generated. It is only by mapping your SIP directly to the investment decisions that you make as trustees, that strategic, tactical and implementation decisions can be quantified. This insight will help to improve your decision making going forward. 

4. Imagine the future

Ensure that a number of modelling tools are used to help inform decision making. It is no longer sufficient just to rely on a black box to forecast where you might be and how the scheme might perform. Both the assets and the liabilities should be modelled stochastically, where real world scenarios can be incorporated, as well as deterministically where what-if scenarios and cash-flow modelling can be investigated. In short, don’t just blindly rely on a single model or metric when trying to make sense of how the world might evolve.  

5. Effectively delegate and prioritise

Should there be an investment sub-committee? Should a Fiduciary Manager be used to implement decisions? Should an Investment Platform be used? The key to ensuring that investment decisions translate into investment actions requires playing to everyone’s strengths. This involves critically assessing whether an adviser or manager can perform a function and whether they are best placed to fulfil that function. When this delegation and prioritising exercise is complete, the SIP should reflect this and facilitate accountability and ownership of the various actions. 

6. Communicate and cooperate

None of these investment decisions can be taken in isolation. The actuarial assumptions, strength of the covenant, sponsors views, trustees’ level of prudence and the adviser's agenda all interact and affect each other. The only way to overcome any obstacles and ensure the overall decision making process is focused and relevant, is to work together collaboratively, communicate effectively and tackle any disagreements or points of contention head-on.

7. Review, reflect and repair deficiencies

Finally, and at risk of repeating myself, trustees should review where they are relative to where they would like to be, reflect on the reasons why they have outperformed or under-performed collectively as a group, and try to focus on the areas which need attention. Just to be clear, this is not looking merely at a funding level metric to gauge the trustee’s effectiveness, but looking more holistically at the decision making process and how that translates into improved member outcomes.

Source: Blog Pension Funds Online