Gill Wadsworth looks at the success of independent trustees in the UK and plans to promote them in the Netherlands, and examines their working relationship with pension consultants
Deciding how billions of euros of other people's money should be invested sounds like a job for a professional, or at least someone with in-depth knowledge of financial markets. But that's not always the way it works in the world of pensions, where trustee boards are usually made up of lay people - a combination of member and employer representatives, with the occasional union representative thrown in.
The idea is that those paying into the pension fund - the company and the workers - should have the ultimate say in where the money ends up, since they are the only ones with a genuine vested interest. Of course, amateurs are not expected to take such weighty decisions without guidance and the consulting community has proved an invaluable crutch to trustee boards across Europe. But as the world of investment has become more complex, the decisions trustee boards must take, particularly during persistent financial crises, increasingly demand additional, professional support.
Cue the independent trustees who have made significant inroads into the UK pension market in recent years and are poised to make a similar assault in the Netherlands.
Since autumn last year, Dutch minister for social affairs and employment Henk Kamp has been considering legislation that could impose professional ‘experts' on Dutch trustee boards. The bill under discussion is designed to improve governance of Dutch pension schemes and could see entire panels of professionals appointed to trustee boards, or just one or two to complement the existing decision-making structures.
Whether pension funds across the Netherlands welcome more professionals into their midst remains to be seen, but in the UK where independent trustees are more established, their contributions are held in high regard.
"Life is generally easier for an investment consultant if the trustees are knowledgeable, hardworking and willing to put the hours in," says Pat Race, head of UK investment consulting at Mercer in the UK. "Most of our clients meet monthly, making it pretty hard labour, so if you have an independent trustee there, who is charging for their service, you can guarantee clients' attention compared to that of trustees from the shop floor who may not have the same skill set."
However, pension fund consultants are not content to work with just any independent trustee; they demand high levels of investment knowledge to aid their own efforts in driving more sophisticated investment strategies.
Phil Page, client manager at Cardano, says that independent trustees with experience of a variety of asset classes and portfolio strategies can bring comfort to a pension fund that has yet to venture into more exotic areas like derivatives or alternatives.
"If an independent trustee has worked on a swap investment programme with another pension fund client and they know it is a relatively routine thing to do, they can show that it is a well-trodden pathway to the member-nominated and company-appointed trustees who have no experience of using these tools," he says.
Investment consultants also appreciate independent trustees' communication skills and their ability to relay complex information to lay board members in language they understand, avoiding the much-hated jargon which typifies a lot of professional advice.
"Independent trustees interpret the conversation between the member-nominated trustees and consultant in a way that facilitates a better discussion between the two parties," says Page.
And it is not just in the defined benefit (DB) arena where independent trustees complement services provided by investment consultants. Defined contribution (DC) schemes also benefit from improved investment expertise, particularly during these times of financial uncertainty and volatility.
Richard Butcher, managing director of independent trustee firm Pitmans in the UK, says his firm has noted an increased demand for a more ‘hands-on' approach to investment governance.
"Investment knowledge is becoming more critical in DC schemes," he says. "Historically, the solutions deployed in DC schemes have been inadequate for a number of reasons. Independent trustees are helping to raise the standards."
There is, however, something of a supply and demand challenge when it comes to sourcing independent trustees with the appropriate levels of investment expertise.
Mercer's Race says that even in the established UK market there are just a handful of independent trustees able to demonstrate a thorough understanding of the complexities of today's pension fund investment strategies.
"[Independent trustees] are not as deep as they could be on the investment side, because they come from a variety of different backgrounds," he says. "I only know about three or four independent trustees who are really strong on the investment side. They are like gold dust."
Butcher maintains, however, that independent trustees do not need to be investment experts themselves; rather they should be a "well-resourced, well-run body that can engage positively and pragmatically". In other words, they need to be able to get the most from their investment consultant or to refer to other bodies, such as investment sub-committees of fiduciary managers, where necessary. "We are not necessarily expected to be investment experts, but we are expected to be able to facilitate quick decision making," he explains.
And this is where the important distinction between professional trustee and investment consultant lies - decision-making. An investment consultant's role is to lay bare the options, strategies and potential outcomes from taking courses of action. The independent trustee, meanwhile, must ensure trustee boards take the most appropriate course of action. As such, both parties argue there is little cause for duplication of effort or conflicts of interest.
"It's very hard for an independent trustee firm to have the detailed investment knowledge that could knock an investment consultant out of their place," says Page. "Let's say you've got a smallish consulting firm with 20 staff working full-time on investment, none of the independent trustees have even a quarter of that resource and focus."
Independent trustees agree they pose no threat to the investment consulting business. In fact, Marian Elliott, director of Atkin Trustees in the UK, says that for the relationships to work effectively, the two roles must be distinct.
"I would certainly not anticipate removing the need for an investment consultant," she says. "It is crucial that roles within a scheme are clearly defined. An independent trustee with investment knowledge can no more replace the investment consultant than a trustee with actuarial knowledge can replace the scheme actuary."
Legislation is yet to determine how independent trustees will develop in the Netherlands, but investment consultants working in that market already have mixed feelings about sharing the pension fund space with a new wave of professionals.
Jelle Beenen, head of Mercer's investment consulting in the Benelux, says trustee boards in the Netherlands would benefit from more resources but adds that his personal preference is to maintain the lay-trustee model.
"I like layman representation by the people who pay the contributions - the employers and the employees - because, typically, these people are not from the investment or pension fund ‘in-crowd' so they have another perspective," he says. "The most difficult questions I am asked are normally by people who are intelligent but not experts."
Beenen suggests that the likely candidates for independent trustee positions would be former investment consultants and fund managers who would fail to question conventional wisdom or popular investment ideas, causing overall portfolio management to suffer.
Whether the Dutch market welcomes the arrival of independent trustees or not, there is no escaping the glare of the pension fund regulator, which is steadfast in its demands for improved governance.
Pension funds are already responding by bundling knowledge, capacity and investment expertise using the recent Dutch multi-OPF law which enables corporate schemes to merge their boards without merging their actual funds. Only one multi-OPF has launched to date, which might suggest that this is a step too far from some schemes and that hiring an independent trustee might be a more pragmatic means of introducing more expertise.
The addition of a professional trustee to pension fund boards has generally been a success in the UK. Investment consultants recognise the input their independent trustee colleagues make, and as advisers propose ever more adventurous investment strategies, the role of professional trustee is set to take on even greater value. Challenges remain in finding adequate numbers of professionals with the relevant investment expertise and unless recruitment can keep up with demand, a major skills gap could emerge in this market. This will be problematic in the UK where independent trusteeship is already held in high regard, but if professional trustees wish to carve out a place in the wider European market they need to prove they can bring as much to the table as their established investment consultant counterparts.