A fresh perspective

James Kavanagh explains why there is a need for trustees of Irish pension schemes to take a fresh approach

Occupational pension schemes in the Republic of Ireland currently account for €74.6 billion (over 40% of GDP) in retirement assets (compared to €87.7 billion in 2006) and are important to thousands of employees, pensioners and the economy.

In recent years, trustees have had to manage constant market volatility and in turn this is having a major impact on the ability of occupational pension scheme sponsors to main-tain defined benefit type schemes in what the World Bank has classified as the “worst global economic downturn since the Great Depression”. Defined contribution mem-bers have also seen large depreciation of funds happen, in some cases over 30% wiped off the valuation of their own pension funds depending on the specific type of “investment fund” they had invested in, although this position has been reversed to some extent and it
is recognised that it is a work-in-progress.

Trustees of these pension schemes who are entrusted to look after these assets have been subject to statutory and regulatory control since 1990 in Ireland and during this time there has been further legislation enacted to support trustees but also to enhance the compliant operations of such pension schemes. Examples of this would include a mandatory requirement for trustees to appoint a registered administrator to provide core administrative functions to a pension scheme or the requirement for trustee training. Despite this, there have many
calls by professional bodies and government for better run pension schemes, particularly around the area of communication, governance and investments. So, with the best interests at heart, are trustees working to the minimum standard of what is required by regulation or are they trying to achieve best practice?

In this article, it is argued that each trustee board and each trustee (led by chair trustees), should be taking “a clean sheet of paper” to the job at hand, challenging how they operate and in short identifying a modus operandi which aims to achieve a higher standard of duty of care so that at the end of the day, the expectation of the ultimate beneficiary, the member, is satisfied.

To support this, consider the following sample of challenging questions:
1. Does your trustee board have a clear set of clear objectives which are subject to regular challenge, monitoring and review?
2. Is there a fit and proper “criteria”for your trustee board?
3. Is your board clear as to the sponsoring employer covenant or is this assumed (and before you answer, ask yourself when the last formal redress to this was made)
4. Are there any conflicts of interests you or your board are aware of? If so, what are you doing about it?
5. Do you clearly understand all of the services provided to your pension scheme and by whom (both internally and externally)?
6. Have you carried out (within the last twelve months) a risk analysis of your pension scheme and how it operates?
7. Are you clear as to the scope of external audit work?
8. Do you have contingent management arrangements?

The purpose of these questions recognises that being a trustee is an onerous task. Trustees have a fiduciary duty to look after the assets of a pension scheme as if they are their own. For many, being a trustee requires time, effort and patience as well as many hours evaluating and reviewing trustee papers (all of which should happen ahead of formal trustee board meetings) – all of which is not typically remunerated. While this deserves huge respect, one cannot ignore the very serious responsible position which one holds when undertaking such a position of being a trustee. Trustees do not like surprises and many professional advisors work to support this agenda but it is nonetheless trustees who should take the lead role here.

It is the trustee who sets mandates, not the advisors
The advisor should have a clear set of objectives with agreed methods of accountability and reporting and the trustee should have a means of monitoring their advisors. On this, it should be made clear that while it is understood that trustee boards delegate certain tasks to advisors, for example, supporting investment decision making, they should not, and cannot delegate responsibility for such decisions. This means ensuring that at the very least there is no asymmetry of information, there are clear objectives and conflicts of interests are identified and managed. It also means trustees engage with their advisors and challenge their propositions, views and ensure there is clear process about all the tasks at hand.

From a governance perspective, it is suggested that trustee boards should have developed their own strategy with vision, mission [statements], high level goals whilst ensuring compliance with legal obligations. The management ethos that supports this should execute that strategy, develop and deliver formidable operations and plans to achieve these goals. A fresh perspective on these lines will help to deliver entitlements to members with suitable investment choices, appropriate disclosure and avail-ability of information and accountability of the board.

Accordingly, it is suggested that trustees consider adopting the following points:
1. Consider the trustee board as a corporate entity and appoint an experienced chairperson who will oversee a strong governance process
2. The trustee board should be run like “a business”
3. Have a clear nomination process for trustee vacancies that includes and identifies skills gaps
4. Implement accountable, control and monitoring measures
5. All trustees on a board should meet the knowledge and training requirements
6. Ensure all trustees have a Trustee Decisions Master File™ with key documents. This will essentially consist of ALL the necessary executed and operational documents which reflect the various trustee decisions to date including Service Level Agreements, Investment Management Agreements – not just legal documents (for which due care and attention should be taken to ensure they reflect current legislation).
7. Identify, discuss and agree a set of Key Performance Indicators (KPIs) so that the trustee board can evaluate their performance. A strong board will consider an impartial and independent party to oversee this.
8. Identify, declare and avoid conflicts of interest (and in particular, this is something the chair of the trustees needs to lead on)

Whilst taking account of the demanding role many trustees find themselves in, not least in these current challenging times, it is imperative that trustees govern in a knowledgeable, robust and professional manner. It is not simply about “ticking the boxes” of the Regulator or revenue authorities, it is aiming to excel best practice. This will hopefully include better engagement with members whilst also supporting the sponsoring employer spend.

The result of a review by Paul Myners in 2001 in the UK on institutional investment by pension schemes saw the introduction of Cadbury style principles for an “effective approach to investment decision making” which have since been endorsed by the British government as a compliant requirement. In 2008/9 the Irish Association of Pension Funds (IAPF) published investment guidelines for trustees around best practice. These are respected guidelines which trustees should consider.

Being a trustee is a significant responsibility requiring expertise and industry-wide experience. Trustees are often faced with challenging decisions as they attempt to balance the interests of sponsoring employers and beneficiaries while running their scheme in an ever-changing legislative environment. These trustees are responsible for ensuring that their scheme is adequately funded and for investing vast sums of money. Therefore, it is vital that they are cognisant of regulatory requirements while understanding how to balance risk with expected returns. Trustees need to mandate their advisors with clear unambiguous objectives and ensure they operate unhindered by any conflict of interest.

Written by James Kavanagh, Managing Director, Trustee Decisions, Dublin

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