The ultimate purpose for pension schemes is to pay out pensions to its members. Sounds simple enough but those familiar with pensions know it is anything but, particularly in the current economic and regulatory environment. While every single basis point counts, much focus has been on funding, compliance and benefits, but less on investments. This has been the poor neglected cousin which has resulted in trustees settling for mediocre investment arrangements.


The recent Competition and Markets Authority (CMA) Review shone the light on poor practices among fiduciary managers and investment consultants, particularly focusing on conflicts of interest, lack of comparable data on performance and cost transparency, and also highlighted the issue of pension schemes not challenging their providers; mainly because of the lack of information or tools to do so. The review was certainly necessary and well received by the pension industry, including IC Select, but was not far reaching or sufficient enough.

The review covered competition but did not touch on the equally important issue of improved governance. Yet research shows that good governance can add as much as 1% per annum to a scheme’s investment returns which for many pension schemes is the difference between success and failure.

Investment is a complex area and our research indicates that trustees do not always understand what they should focus on and what they can delegate. Trustees that lack the skill or time to question the investment advice given should consider other methods of investment governance and should instead focus on an investment governance model that focuses upon high-level strategic decisions.

The 10 December 2019 deadline for setting objectives is fast approaching and there is a real concern that the provision of advice to pension schemes could come to a halt as many trustee boards seem to be asleep at the wheel.

This must be done before the deadline date or the investment advisor will no longer be able to provide the services it was appointed for, rendering the schemes ungovernable.

The Pensions Regulator’s Guidance offers some help to trustee boards with pragmatic advice, which is welcome, but the challenge of getting the monitoring framework right remains. Developing the proposed scorecards to capture all aspects of the advice to be measured will take time to develop and that time is fast running out for the trustee boards.

However, fiduciary managers will have to significantly up their game in order to compete in a market that grows some 30% per year with margins of 20-30% and with an expected 500+ tenders in the coming years. Upping the game among fiduciary managers will have a positive knock-on effect on investment advisory consultants, which is still the predominant investment governance model for DB pension schemes in the UK.

Getting the investment governance framework right will be a win-win for all concerned.

Members will have confidence in their pension entitlements until they die, sponsors are more likely to save money both from the cost of accrual and deficit recovery contributions, and trustees will have done their job to the best of their ability in securing pension payments for the members.

Getting it wrong on the other hand will cost everyone involved dearly. In a worst case scenario, the pension scheme ends up in the Pension Protection Fund (PPF) and members do not get what they were promised or what they expected. Not to mention the reputational risks for both trustees and sponsors.

The maximum PPF pension is currently capped at £40,000 at the age of 65, which would be a significant hit for many but in particular senior executives.

Those who have yet to reach retirement age only receive 90% of what they were originally entitled to, and on top of that the annual inflationary increase will be restricted to CPI, which may be significantly lower than promised in the pension scheme rules. In this scenario trustees and sponsors alike risk ending up in front of a Select Committee and hauled over the coals by the press. If found negligent trustees can be jailed, fined, sued and debarred; a sure way to ruin a career and reputation if ever there was one.

If this sounds overly dramatic, the likes of BHS and Carillion in recent years should not be forgotten. Not forgetting the more run of the mill cases of below-bar investment governance which have left schemes poorly funded despite years of deficit recovery contribution by the sponsoring companies.

Trustees now need to act fast in order to achieve a positive outcome for the industry and ultimately for the members. It cannot be said often enough that ‘what gets measured gets done!’

Good investment governance demands appropriate advice, expert monitoring, competitive tendering and transparency of costs. Furthermore, in accordance with the CMA Review, good governance demands that both fiduciary management and investment consultancy providers require oversight, otherwise how can you assess success and value for money?

This should always have been a necessity not a nicety but until recently this has proven difficult to achieve and implement. Now that the tools exist and independent third-party evaluators (TPE), such as IC Select, can shine the light on poor practices and help raise the bar on investment governance, there is no excuse not to use all means available to get it right and raise their game.

DB trustee boards are not lazy or stupid. For far too long they have simply been starved of the necessary information and insights into how to make the most effective investment decisions for their schemespecific circumstances. This is changing for the better, but trustees and investment advisers all need to be on the ball.

Trustees of today should bear in mind that they will be judged by the standards of tomorrow and that they had better know the road they have chosen because unlike Alice in Wonderland, any road will NOT do!

Donny Hay
Director – IC Select

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