Intelligent thinking: how good are pension schemes at decision-making?
One of the worst insults ever hurled at pension schemes is that they are often hundred million-pound businesses run with all the sophistication of a corner shop.
Since that was first uttered, trustees have started meeting more regularly and proactive arrangements have been put in place for schemes to act quickly and decisively.
Here we have asked schemes, trustees and investment consultants to what extent there is a problem in the pensions industry over slow and inefficient decision-making, and what impact has this had on investment returns in their experience.
The diagnosis
For some, there was recognition that the train had already left the station.
“With hindsight you’d have to say that the decision to invest hugely in equities and not materially hedge liability risks was a bad decision.
“In addition, there have been chances to invest in attractive opportunities, or to hedge liability risks, in the past few years. Most of these have not been taken.
“This has led to most pension funds being badly underfunded,” says Phil Page, client director at Cardano.
For others there was a recognition that the conventional trustee model is still challenged.
“There will always be an issue where there is two-tier decision-making unless the trustees (or board) hand the decisions over to the someone at the investment coalface.
“The need for copious amounts of historic reporting absorbs precious resource. The size of funds is uneconomic. We could do better together in the Local Government Pension Scheme and perhaps using the industry groupings favoured by the Europeans in the private sector,” says the chief investment officer of a multi-billion-pound defined benefit scheme.
Though, there is optimism. “While many schemes have some way to go to improve their ‘reaction speed’, the direction of travel is clear and there are now a range of approaches available to trustees looking to build in a greater degree of responsiveness and dynamism into their strategy,” says Phil Edwards, a principal at Mercer.
Though some questioned whether faster decision-taking was an end in itself. Informed decision-taking based on a clear and common understanding of objectives was more important said one. Another cited risk management over speed as vital.
Others also cited the slow or challenged implementation as the culprit. One pointed out that sharp, tactical decisions could “fail to live up to promises”.
The importance of speed
If there was not unanimity on the precedence of quick decision-making in the priority order for trustees, there was consensus on its worth.
When asked how important effective and efficient investment decision-making was for pension schemes, all agreed – the most popular description of it being ‘very important’, with others describing it as ‘vital’, ‘crucial’, ‘essential’ and a couple saying it was ‘paramount’.
The reasons given largely included the time constraints on investment opportunities. The solutions typically included outsourcing, building in-house teams, creating larger funds, or the frequency of meetings.
Fiduciary or not fiduciary? That is the question
The arguments for fiduciary management are well aired, though some of the responses saw it not as an all-encompassing solution but as a tactical move for areas where the trustees recognised deficiencies.
One added that trustees were not particularly keen on fiduciary managers.
Solutions
There was favour for small specialised subcommittees that met regularly and were able to gather at short notice in events of crisis or opportunity – or at least schedule a teleconference.
There was also favour for empowering these committees with decision-making rather than a monitoring role.
“We usually advocate both a smaller investment committee with a mandate from the full trustee board to meet more often to discuss investment issues, as well as a separate smaller working party able to meet either in person or via other means to make decisions on a week-to-week basis.
“This typically allows a much tighter decision-making cycle as well as requiring less time to be spent on catching up on previous meetings,” says Pete Drewienkiewicz, head of manager research, Redington.
Not wishing to get overexcited about such changes, others urged a cautious and gradual approach to such change, as well as education and training.
“For advisory clients there is a balance between moving quickly and overloading them with potential actions.
We find that the best approach for advisory clients is to maintain an ongoing focus on the major factors that affect their funding position, rather than seek to invest in every attractive opportunity,” says Phil Page, client director at Cardano.
The information
A member-nominated trustee at a £4bn DB scheme asked for standardisation of investment analysis and reporting by fund managers.
Ideally, he said, each investment should be worded in terms of its impact on the pension scheme, its risk, return and liquidity too.
Do multi-asset strategies represent an opportunity for trustees to hand back responsibility to managers?
If a scheme a) cannot move fast enough to gain the best investment opportunities; b) cannot afford a chief investment officer; or c) dislikes the idea of fiduciary management – does it then employ a multi-asset fund to make dynamic investment decisions?
For some, the very wording of this question is provocative as it suggests an abrogation of trustee responsibility. For others there is a pragmatic acceptance.
“The adviser role is now significantly more critical as trustees no longer have time to meaningfully monitor a range of investment environments or individual managers,” says a member-nominated trustee.
And the director of a £500m private sector scheme says that while trustees have the overall responsibility, fund managers can take more if monitored properly.
The chief investment officer of a large pension scheme says: “If I were running a small pension fund I’d give multi-asset funds serious consideration as they enable the fund to gain exposure to areas they could not possibly invest in on their own.
“Trustees never hand over the responsibilty but these funds can provide an increased opportunity set.”
Next week’s Intelligent Thinking survey looks at what schemes and consultants really think about diversified funds
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