Costs really matter
Lay representation on pension fund trustee boards is one of the hallmarks of occupational pensions in Europe and other parts of the world. Lay trustees, usually staff representatives, are meant to improve the decision-making process by bringing independence of thought and perspective. Not least, it is seen as right for pension fund members to play a role in overseeing their own retirement savings.
And while most employee trustee representatives will not be financial professionals, gaps in knowledge can be filled through training courses.
Some argue that consolidation of pension funds damages this important hallmark of a pension system by reducing the role of lay people and potentially overstaffing boards with like-minded specialists.
Ireland’s regulator, the Pensions Authority, has signalled a desire for the many thousands of tiny defined contribution pension schemes to consolidate, perhaps using master trusts. In common with other countries that use trust law, including the UK or Cyprus, individuals and employers have made extensive use of trust structures to create pensions schemes – so much, in fact, that they are difficult or impossible to oversee because of the large numbers of them. The Irish proposal, in particular, has been criticised for downgrading the role of lay trusteeship in the pension system.
But the presence, or otherwise, of lay trustees on a board is not the right issue. As governance experts have pointed out, a well-composed board needs to have a wide range of expertise of all necessary kinds at its disposal.
As Irish pension funds and others adopt liability-driven investment strategies, both specialist, in-depth board knowledge and an independent perspective are increasingly invaluable to ensure the strategy is set and executed correctly, and to hold management to account.
Appointment of independent trustees can help provide this specialist risk or investment knowledge. So the debate about board composition should be one about a spread of expertise, not purely about whether trustees are lay or specialist, independent or representing staff or sponsor interests. A key element is also time spent on governance issues and the appropriate remuneration. A fixed retainer and guidelines for expected time commitment probably work better than a per-diem fee for time spent at meetings. All regulators should facilitate the development of best practice in pension governance.
In the Netherlands, the regulator has increased trustee knowledge requirements to such a degree that many pension funds struggle to fill positions, and this factor alone itself is thought to have contributed to the dramatic consolidation in the number of pension funds in recent years. The trend is continuing and looks set to continue elsewhere in Europe too.