“At present, UK trustees do not have the right governance framework in place to be effective or accountable” 

Football managers have among the highest turnover rates of any profession. Once relieved of their duties, they often cite ‘a poor squad’, ‘a lack of funds’ or ‘bad luck’ as the reasons for failure.

Ultimately, they are let go because the chairman, board or owner believe the manager is accountable for the performance. The fact that the manager may have been poorly selected in the first place is often conveniently overlooked. 

The world of pensions is, thankfully, very different. There is, however, one crucial similarity: just as the bottom clubs struggle with their performance, so many of our pension schemes are struggling with theirs. In the UK today, we face a full-blown crisis.

In the past decade, defined benefit (DB) funding deficits have grown by roughly £400bn (€454bn). Approximately 1,000 funds could end up in the Pension Protection Fund (PPF). 

The pensions industry has generated its own list of reasons: quantitative easing; life expectancy; market volatility and shock events. The aforementioned reasons certainly have had an effect on many schemes – but the adverse effects could have been mitigated.

Some 20 years ago, schemes were introduced to sophisticated, highly effective, risk and investment management tools. These included interest rate and inflation risk management, liability-driven investment portfolios, and a high-quality approach to asset diversification. 


Some schemes adopted these approaches. But most did not, which is one reason why we have seen so many problems. The explanation is simple and straightforward: the UK’s pension schemes have had a collective failure of governance.

First, let us be clear: the vast majority of trustees are intelligent, committed and diligent. This is an appeal to help them. At present, they do not have the right governance framework in place to be effective or accountable.

As things stand, no one – trustees, sponsors, nor anyone else – is truly accountable for the financial outcomes that occur. This is the root cause of the UK’s DB problems. Citing a complete failure of governance is uncomfortable. DB pensions have existed for decades, yet, no one has been held accountable for the performance of these assets.

This governance gap is a result of the trust-based system. Trustees’ primary responsibility is to pay pensions when they fall due. Provided this sponsor can absorb potential losses, the trustees are perfectly entitled to take risks. The fact that doing so may produce repeatedly disappointing outcomes could be dismissed as bad luck, and does not necessarily reflect poorly on the trustees. Quite the opposite, in fact – they will have fulfilled their obligations and the sponsor will simply have made good the losses.

At the same time, while sponsors seek to influence the trustees on investment strategy, it would be unheard of to have a CFO or CEO report to their board that the deficit expanded because the sponsor encouraged the trustees to take risks that had not come good.

Simply put, trustees ask themselves whether they have a credible or defensible basis to support their decisions when they should be asking how their decisions have affected the funding position.

There is a solution to this governance gap. We need to clearly assign accountability for financial results and encourage robust risk management. To do this, we must look to the governance model in the corporate sector.

The UK’s 1992 Cadbury Report set out recommendations to ensure proper corporate governance. Its recommendations are reflected in the more recent OECD Principles of Corporate Governance.

Today, corporate governance has three layers. Shareholders appoint directors who represent their interests. Directors appoint an executive team and set the strategy. They are accountable to shareholders for the financial results. If the company does not deliver, the directors will change strategy or replace the executive team.

The directors are competent but not necessarily experts in the field. They function as effective representatives of the shareholders because they appoint, manage and monitor professional experts who can focus full time on delivering the strategy.

Britain’s pension funds need a mirror image of this system.

The member representatives and the sponsor appoint the trustees, who should be held accountable for the financial outcomes of the scheme.

The trustees set the strategy and appoint and manage the executive team against a set of key financial indicators.

An internal CIO, or external fiduciary manager, acts as the equivalent of the corporate’s executive team.

Profit maximisation is replaced by fulfilling pension promises without taking excessive financial risks.

Under this model, trustees are clearly accountable for the actions taken by the professional managers who make decisions designed to meet the pensions promised. In turn, the trustees are accountable to the scheme members and the sponsor, who appoint them in the first place.

The whole system is enshrined by the Pensions Regulator, and performance and outcomes are judged under this governance approach. Decisions are taken clearly and accountably, and a system of influence without accountability is removed. 

The net result is a large behavioural shift driven by only a small practical change in governance. As long as we avoid a ‘hire-and-fire’ culture we will have a far more transparent and better-equipped system to run DB pension schemes. 

It is vital to close the governance gap, with a system built on the principles of corporate governance, before that happens.

In football, a poor team could face relegation to a lower division where it might recover and return to the top-flight. 

The UK’s pension schemes have only one opportunity to ensure they meet their purpose and pay benefits out in full. 

A new, stronger governance model is the best chance they have to hit the back of the net.

Kerrin Rosenberg is UK CEO of Cardano and Stefan Lundbergh is director, Cardano Insights