Weakness in communication and allocation of responsibilities between pension fund trustees, sponsors, consultants and asset managers
The role of the pension trustee in today’s complex regulatory and investment environment is now so demanding that many boards recognise the need to reassess their key advisory relationships, especially those with investment consultants and asset managers. Among trustees questioned for a new Economist Intelligence survey, 62% say that schemes have a pressing need for external advice, and 49% say that it is important for the asset manager to be involved at an earlier stage in the investment process.
These results form part of It’s time to talk: the urgent need for dialogue to strengthen governance of UK pension schemes, a newly released Economist Intelligence Unit survey and report sponsored by Goldman Sachs Asset Management. The author of the report was Debbie Harrison, senior visiting fellow at the Pensions Institute, Cass Business School.
The report reveals a high level of commitment among trustees to their role and finds that the majority of trustees continue to think that the trust-based system for scheme governance works well in the current environment. It also concludes, however, that there is an urgent need for more frequent and open dialogue between trustees and their key advisers if the current model is to remain appropriate in the future.
“Although most trustees questioned for this report say that the current trust-based system is not in crisis,” says Rob Mitchell, editor of the report, “they highlight important areas where governance and relationships with key advisers could be improved. For example, a sizeable minority believes that the relationship with the sponsor company is less than successful, and around two-thirds express doubts about the ability of the investment consultant to recommend innovative investment strategies.”
Other key findings of the report include:
The employer covenant receives limited attention. The 2004 Pensions Act identifies the employer covenant (the ability and willingness of the employer to fund the scheme) as one of the crucial issues for trustee understanding and analysis. Thirty-nine percent of respondents say that they spend little or no time discussing the covenant at their trustee meetings. Given that the strength of the employer covenant can change quickly as a result of new corporate activity, funding requirements or changing financial performance, one might have expected a higher proportion to feature regular discussion of the employer covenant as part of their agenda.
Performance measurement of investment consultants often lacks rigour. Most schemes have only rudimentary methods for measuring the performance of their investment consultant, despite their critical role in the selection of asset managers and their influence over asset allocation decisions. While overall, survey respondents say they are happy with the service they receive from their investment consultant, they have limited confidence in the ability of their consultants to recommend innovative investment strategies and tools, such as derivatives and alternative assets, with only 35% of trustees rating their consultant as good or very good in these areas.
Relationships with the sponsor company can often be strained. Fifty-four percent of respondents say that the relationship between the pension scheme and sponsoring company works well or very well, but that leaves a sizeable minority who believe that the relationship is less successful. Qualitative research conducted for this report suggests that conflicts of interest are reportedly forcing the resignation of many company-nominated trustees, depriving affected boards of both specialist financial knowledge and a channel of communication with the sponsor.
There are gaps in trustee knowledge and understanding. The complexity of the investment environment means that trustees face a considerable challenge to keep pace with developments. Survey respondents are aware of gaps in their knowledge and understanding of topics, including the use of derivatives and current trends in asset management, such as liability-driven investment. Sixty-five percent say that they need more training in the former, and 56% indicate that they need more training in the latter.
In conclusion, the report suggests that the current trust-based model is hampered by limited dialogue between trustees and their key advisers, and suggests that a more inclusive model of scheme governance is required.
About the report
It’s time to talk: the urgent need for dialogue to strengthen governance of UK pension schemes is an Economist Intelligence Unit report, sponsored by Goldman Sachs Asset Management. The Economist Intelligence Unit’s editorial team conducted the interviews on which the analysis is based and wrote the report. The survey consisted of 143 UK pension trustees, who came from a range of scheme sizes and types, and who hold a variety of different roles on trustee boards.
About the Economist Intelligence Unit
The Economist Intelligence Unit is the world leader in global business intelligence. It is the business-to-business arm of The Economist Group, which publishes The Economist newspaper. The Economist Intelligence Unit provides geopolitical, economic and business analysis on more than 200 countries, as well as strategic intelligence on key industries and management practices. With over 300 full-time professionals in 40 offices around the world, supported by a global network of more than 700 contributing analysts, the Economist Intelligence Unit is widely known for its unparalleled coverage of major and emerging markets. More information about the Economist Intelligence Unit can be found at www.eiu.com.
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