The paint manufacturer's £236m scheme has outlined how it tackles due diligence risks and conflicts of interest under its fiduciary management agreement
Mike Clews, who is also chair of trustees, said the governance structure had enabled the scheme's board to spend more time discussing the overall investment objectives rather than getting "bogged down" in discussing the performance of individual managers.
Fiduciary management: key numbers
42 per cent – swing in Pension Protection Fund's 7800 Index since its inception, showing volatility of scheme funding.
500 – number of European schemes using fiduciary management service in 2011, according to Spence Johnson.
85 per cent – proportion of DB schemes with flightplan in place or plans to put one in, up from 56 per cent in 2011, according to an Aon Hewitt survey.
"Though we have not reduced the amount of time we spend discussing investment matters, it has become a much higher level of discussion," he said.
"There is a great deal more speed in making decisions simply because the trustees do not get in the way."
He added: "On our trustee board there is nobody who would claim to be an investment expert. There was always a temptation to ask for more information and put off making a decision."
Aon Hewitt has estimated around 300 UK schemes currently have some form of outsourced governance structure in place, which is approximately 5 per cent of all defined benefit schemes.
Many pension funds have been attracted to this type of arrangement – which includes implemented consulting and delegated consulting – as it takes day-to-day decisions out of the hands of trustees.
This can allow for quicker decision-making, which enables funds to take advantage of short-term market moves.
However, there are some critics of this framework who claim it creates conflicts of interest because the professionals brought in to decide where the money is invested are often also managing the funds.
Why PPG chose fiduciary management
The £236m PPG Industries DB scheme closed to future accrual in 2010 and is 67 per cent funded. It has 2,393 members, of whom 686 are pensioners.
We spent some time in their offices and looked around their systems. It was very educational
Mike Clews, PPG
In 2008 the trustees decided to embark on 15 months of training on investment matters to give them a better understanding of different asset classes and enable them to implement a more sophisticated investment strategy.
"The big revelation to us was that we probably weren't the best people to do that," said Clews, speaking at the 2012 National Association of Pension Funds conference in Liverpool.
The scheme then decided to hire a fiduciary manager and received presentations from a number of different providers before settling on Aon Hewitt.
But Clews said it was important that the selection process was very rigorous as the company viewed the new provider as acting as a strategic partner rather than just a service provider.
"Rather than just going on their glossy presentations, we spent some time in their offices and looked around their systems. It was very educational," he said.
"We spoke to their auditors, read reports, spoke to their custodian manager. We tried to get underneath the skin of what we were being told."
The scheme was concerned at the high levels of growth within the fiduciary management industry and felt there was the potential for either Aon Hewitt's approach to change or its focus to shift on to attracting new business.
Clews said the scheme tackled this risk by continually reviewing the due diligence and making sure the provider was offering agreed level of service.
"You need to review the due diligence regularly: have regular meetings with the fiduciary manager; make sure there is regular reporting; and make sure they stay within the boundaries we set at the outset," he said.
One of the main criticisms of fiduciary management and other forms of outsourced governance is providers having conflicts of interest.
Clews said PPG dealt with this risk by ensuring it kept its investment consultant in place to be able to provide an independent view of how the fiduciary manager was performing.
Reasons for outsourcing governance
Many schemes feel their trustees lack the investment expertise to be able to make decisions over a growing range of sophisticated asset classes.
Trustees sometimes make good decisions by accident but it is always better to get the professionals in
Martin Mannion, GSK/NAPF
Martin Mannion, chairman of the National Association of Pension Funds Investment Council and director of pensions finance and risk at GlaxoSmithKline, said a traditional trustee board was made up of people from a range of backgrounds, often with no financial experience.
He said they often wanted to make investment decisions as it was an interesting area but added: "You need to wean them off it.
"They sometimes make good decisions by accident but it is always better to get the professionals in."
Sion Cole, head of client solutions at Aon Hewitt's fiduciary business, said another reason schemes were interested in outsourcing their investment governance was it allowed for quicker decisions.
"The markets tend not to wait for the next trustee meeting and often the opportunity presents itself between trustee meetings," he said.
