Analysis: There are myriad tasks involved in running a scheme, so time is precious and efficiency is key. But when it comes to evaluating advice, how can trustees measure performance, and should they be reviewing their consultants more frequently?
From legal matters to covenant decisions, pension scheme trustees are required to seek advice in a number of areas. But it is the investment consultancy industry, in particular, that has come under fire in the last few years.
At the heart of a good relationship between client and adviser are cost and chemistry, and in some ways the latter is probably more important than the former
Alan Pickering, Bestrustees
In the Law Commission’s 2014 report on Fiduciary Duties of Investment Intermediaries, it was noted that the “highly concentrated” nature of the investment consultancy market meant many schemes may be receiving very similar advice.
More recently, in November 2016, the Financial Conduct Authority found that investment consultants are not able to identify managers that offer better returns, and raised concerns that many institutional investors struggle to monitor and assess the performance of the advice they receive.
Challenging advice
Richard Butcher, managing director of professional trustee company PTL, said that, first, many schemes are not assessing their advisers regularly enough, while some do not do it at all.
Second, he said, lots of trustee boards “are not reviewing the quality and value of the advice” they receive. While the second point “clearly overlaps with the first”, many trustees are given advice and follow it without challenging or questioning it, said Butcher.
“The advice may be wrong, and if you don’t challenge it you won’t get to know that it’s wrong,” he explained. Also, “the adviser may actually have misunderstood the question that you asked them, so you do need to challenge it to make sure they really understand” what they have been asked.
There has been an increased amount of focus on lay trustees, who may be more heavily reliant on their advisers. In its ‘21 Century Trusteeship and Governance’ paper, which closed last year, the Pensions Regulator made it clear that it intends to ameliorate the competenceof both professional and non-professional trustees by introducing qualifications.
Butcher noted that lay trustees are less likely to challenge their consultants’ advice because they may not have sufficient knowledge and experience.
While it is difficult to measure the quality of advice, Butcher said testing tangible things can be an effective way of assessing whether a consultant is doing a good job. This includes reviewing whether they are responsive, proactive, personable and able to give clean and concise advice, noted Butcher.
Reviewing
“The regulator thinks that we should evaluate our advisers every year, and that’s ludicrous. For a start [trustees] have too many advisers to review them every year formally,” Butcher argued.
He said: “We constantly informally review our advisers but we formally review them on a three-yearly cycle.”
Alan Pickering, chairman of professional trustee company Bestrustees, also said he would preferably like to do “a refresh review with an incumbent adviser every three years”.
This “three-yearly refresh review with an existing supplier is much more cost effective for all concerned than feeling obliged to market test every three years,” said Pickering. This can apply to auditors, investment consultants or actuaries, he said.
How to ensure your consultants are not conflicted
Trustees are required to seek specialist advice when running their scheme, and in doing so, conflicts of interest are likely to arise.
Pickering noted that, “at the heart of a good relationship between client and adviser are cost and chemistry, and in some ways the latter is probably more important than the former”.
He highlighted the importance of coming up with "a proper budgetary outline" to identify and prioritise tasks, while ensuring there is a budget for any "unknown unknowns". But ultimately, “it’s very difficult to test value for money accurately”, Pickering added.
Emma King, partner at law firm Eversheds Sutherland, said that when it comes to how often trustees evaluate advice “it’s all subjective”. However, generally trustees “may not be doing it as frequently as they should”, she added.
King said: “An assessment as to how an adviser or consultant has performed over the course of the year is the minimum they need to be doing.”
In addition to this more informal reviewing on an ongoing or yearly basis, there should be “a proper review” where trustees invite other consultants to come and present to them “so that they actually properly see what else is in the market”, said King.
