Any other business: Asset manager Pimco has been making headlines in the past week after the departure of CIO Bill Gross. It was a perfect example of 'key-man risk’, leaving schemes to reassess any reliance on a star performer.
Gross’s move is a good example of what is known as ‘key-man risk’, that which is posed by a star performer leaving. So how can trustee boards ensure they are protected from similar problems?
Such risks can appear in a number of forms in scheme governance teams. Peter Askins, director at Independent Trustee Services, said people who have been involved in the scheme for a long time – even if not always in a trustee capacity – can develop strong feelings of ownership for the scheme and how it is run.
Not only did he keep his own records, but he kept them at home. Because there had been a number of changes of administrator he had the only set of data
Peter Askins, ITS
“Quite often trustees are people who’ve been involved with the scheme for many years, not necessarily as trustees... they take it to heart that it’s their scheme,” he said.
This has led to situations where a trustee keeps their own set of records for the scheme, often of a higher quality than those of the administrator. Askins gave the example of a trustee who kept scheme records in his garage.
“Not only did he keep his own records, but he kept them at home,” he said. “Because there had been a number of changes of administrator he had the only set of data.” The records have since been duplicated by the scheme.
Richard Butcher, managing director at independent trustee company PTL, said the greater threat was loss of scheme memory from the death or departure of long-serving trustees with deep knowledge of the scheme and its history.
“You can’t replace scheme memory,” he said. “What you can do is get people to write things down, but then people have to become familiar with it.”
He also gave the example of a scheme that entered critical negotiations, but board members were conflicted so the trustee board was left without a quorum.
Ian McQuade, client director at independent governance consultancy¹ Muse Advisory, said key-man risk could be a consequence of long-serving employees joining the board.
“They have more experience and knowledge. The downside is they’re older and… their knowledge doesn’t always go across.”
He added: “One of the things we focus on is knowledge capture."
This could present challenges of its own, for example, if trustees fear they will become obsolete if everyone has their knowledge.
McQuade said: "As long as people understand why you’re doing it… once they recognise that risk they are happy to do something about it."
Schemes have been encouraged to look at advisers as well as trustees when evaluating risk.
“A lot of professional trustees work on their own and take a lot of responsibility,” said Butcher, adding the risk presented by independent trustees could be mitigated by companies working with a colleague shadowing them.
Askins said: "You just don’t know until something goes wrong. We have to know about it. It’s very important that schemes and sponsors are made aware so it can be mitigated."
¹The original version of this article incorrectly referred to Muse Advisory as an independent trustee firm, rather than an independent governance consultancy. This has been updated.
