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Professional Pensions: Don't let advisers set and mark their own homework

This article was published in Professional Pensions| 17 May, 2022

In the world of defined benefit pensions, just like anywhere else, pursuing improvement is a continuous process.

Boards of pension trustees will have long ago set out strategic investment objectives for their investment consultant or fiduciary manager, after the Competition and Markets Authority (CMA) made the process mandatory in December 2019. 

But how many of them will have revisited and adjusted those objectives, and how many will have independently assessed how well their investment adviser has lived up to them? For us at IC Select, needless investment underperformance has been the enemy of pension schemes for too long. We believed that the CMA's decision was a potential game changer. In truth, while the rules have changed, too much of the game remains the same. 

The main finding of the CMA's review was, in essence, that trustees were not challenging the advice they were being given by their investment advisers enough. In our view, in the wake of the CMA's ruling, too many trustees simply let their consultant or manager take the lead in setting their strategic investment objectives, tweaking them at best, but all too often cede the monitoring and assessment process to that very same adviser.

In fairness, the nature of the relationship - mainly lay trustees negotiating with seasoned investment professionals - doesn't make challenge easy. But there are, nevertheless, ways that trustee boards can assert more control over proceedings and put in place a set of concrete measurement tools that can help to arrest investment underperformance.

As spelled out by The Pensions Regulator (TPR), trustees retain ultimate accountability for their scheme's investments - so it is imperative that they get involved.  

 

A balanced scorecard approach

We advocate - as does TPR - the use of a balanced scorecard approach in setting scheme investment objectives. This means that the trustees' priorities, for performance, investment advice, the prominence of environmental, social and governance issues, and expectations for reporting and disclosure, are clearly identified and communicated to the investment adviser. 

Each of the components should be weighted and scored and, if necessary, synthesised into a single overall score. The structure should be a dynamic one, where softer objectives, such as ‘clear and concise reporting', can be set alongside harder targets, for instance ‘achieve a return of gilts plus x%'.

Crucially, all of the objectives should be realisable, actionable and measurable. This way, trustees have a set of quantifiable benchmarks that they can return to and assess with clarity and confidence. 

Setting objectives, however, is just the first step. Trustees should regularly revisit their scorecards and evaluate their adviser's performance, including sending them questionnaires and commissioning independent analysis if required. 

If market conditions change or trustee priorities shift, then there's no reason why the scheme's objectives cannot be modified and the scorecard changed to reflect it. 

By adopting this approach, trustees should be able to set the best strategic investment objectives for their advisers and have an effective way of holding them to account. 

Donny Hay is a director at IC Select


 

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Tuesday, 28 June 2022