Investment oversight – trustees should ‘mind the gap’

This missing governance gap should be a priority considering investments account for 80 per cent of the total cost of pension fund ownership, and therefore should matter most to both sponsors and members.

Industry research shows independent fiduciary manager oversight remains low at around 22 per cent of funds, in contrast to more than 70 per cent of funds that now use independent evaluators to undertake selection exercises.

The situation in advisory relationships is even more alarming. Independent oversight of investment advisers is almost non-existent, despite these having the greatest impact on whether a pension scheme can meet its liabilities.

Independent oversight of investment advisers is almost non-existent, despite these having the greatest impact on whether a pension scheme can meet its liabilities

Good practice becomes statutory obligation

What was previously considered ‘good practice’ is now becoming more of a statutory obligation, with fines and criminal liability lurking in the background. Being asleep at the wheel is now unlikely to cut it in a court of law.

The Pension Schemes Act 2021, which came into force on February 11, places increased responsibilities on DB pension scheme trustees and employers.

Employers now need to ensure that their corporate governance plans specifically consider DB pension schemes and the risks therein. This will increase their interest in the oversight of their pension funds, and engagement with trustees, beyond the triennial valuation.

In addition, the combination of Clause 107 (introducing new criminal sanctions) and the scheme funding obligations, in particular, raises the bar in terms of investment governance for DB schemes.

The conduct of trustees will be under increased scrutiny to ensure that it does not “detrimentally affect in a material way the likelihood of accrued scheme benefits being received”.

The Pensions Regulator has greater powers under the Pensions Schemes Act to ask for strategies to be amended, issue fines of up to £50,000, and there is now criminal liability facing trustees, advisers and business owners.

Trustees need to extend oversight

There is no need to reinvent the wheel. Most trustees will already have experienced the benefits of oversight as part of their regular monitoring of the asset managers that work for their fund.

All that is needed is to extend this oversight to cover their investment consultant or fiduciary manager. Independent third-party evaluators are well placed to help trustees and sponsors and to customise their analysis to the specific circumstances of each scheme.

Key questions trustees need to answer include:

• Are they monitoring the DB scheme’s investment strategy and their advisers effectively?

• Are they undertaking independent oversight of their advisers?

• Are they measuring the effectiveness of their investment governance framework?

• Are they able to judge value for money?

Effective oversight will allow trustees to understand:

• Performance: how does performance compare with the investment objectives set by the trustees and other market participants?

• Cost: how do costs compare against a competitor fee benchmark, and are they in line with the investment management agreement?

• Capabilities: does ongoing due diligence research of the company demonstrate it is still a fit and proper organisation capable of delivering and adding value in the provision of the service offered?

• Reporting: are the key criteria that make up good reporting in place and how do they compare overall with best in class?

Trustees can lead the way in raising governance standards. Their effectiveness will not be measured against the expectations of today, but against the increasing stringent regulations of tomorrow.

Peter Dorward is managing director at IC Select