Continental European pension fund managers have more confidence in their pension fund boards and investment committees than UK counterparts have in their trustees. This was one of the findings to emerge from the Global Asset Study conference organised by benefits consultants Watson Wyatt in Brussels last month.
In an electronic poll, 58% of pension fund delegates said there had been no change of chairman of the pension fund board in the past three years. Nor was there any evidence of significant turnover in membership of investment committees. Two thirds of pension fund delegates said there had been “not very much” turnover in their fund’s committee, compared with 26% who said that there had been “a lot” of turnover and 6% who said that turnover had been “significant.”
Roger Urwin, global head of investment consulting at Watson Wyatt in the UK, commented: “That shows two thirds of you are in pretty good shape.” He said that the comparatively low turnover of board chairmen and investment committee members was an improvement on the situation in the UK, where turnover among members of investment committees was too high.
With last year’s review by Paul Myners still much in mind, the study session focused on the subject of effective investment decision-making. The question was whether pension fund boards and investment committees had the capabilities and competencies to make the right investment decisions. John Heymans, the managing consultant for Watson Wyatt Brussels Consulting, pointed out that people making investment decisions on behalf of pension funds are being asked to take more decisions of increasing complexity within shorter time frames.
Not surprisingly, governance – the organisational structure within which people exercise control over a pension fund – came up for scrutiny. Here again continental European funds showed they were well up in the field.
Pension fund delegates were asked whether their pension fund board or investment committee had undergone governance review in the past three years. More than three quarters (77%) said there had been a review, and two fifths (41%) said this review had been “significant”.
“This is where pension fund codes actually do get people to take action ,” Urwin commented.
The question of who the key figures are in the governance of pension funds was less clear, however. Pension fund delegates were asked what they considered was the biggest factor in the way their pension fund board or investment committee operated. Opinion was spread evenly. Almost a third (31%) said that the most important factor was the culture of the sponsoring company or pension fund foundation.
More than a quarter (27%) voted for members of the investment committee, while an equal proportion (21%) cited either the chairman of the pension fund board or investment committee or the experience of the pension fund board or investment committee.
“We regard leadership as critical.” Urwin commented. He also emphasised the importance of a plan. “Pension funds need a business plan. The idea of a might sit uneasily within the thinking of pension fund boards or investment committees but that is what they need.”
In his review, Myners suggested UK trustees ask themselves a set of questions to test the decision-making process. Watson Wyatt re-framed four of these questions for European pension fund boards and investment committees.
“Have you set terms of reference or objectives for the fund?” A majority of pension fund delegates (56%) said they did, 24% said they did to some extent while 21% said they did not set objectives.
“Have pension fund boards established what skills and knowledge are necessary for each decision?” Less than a third (31%) of pension funds said they had. More than half (51%) were doubtful while almost one in five (17%) said their boards had not assessed necessary skills.
“Do the current decision-makers have the necessary skills and knowledge to take all the decisions effectively?” Here the response was more encouraging. More than half (57%) said they did, while a third (37%) were undecided. Only a small minority (6%) admitted that their decision-makers did not have sufficient skills and knowledge.
“Do the pension fund boards and investment committees have sufficient in-house investment support?” Generally, pension funds felt they did. Half said they did, although a sizeable minority (32%) said they did not.
The key to good decision making is the confidence that the company or plan sponsor will fully back the pension plan and provide the benefits promised. Brian Hill, senior investment consultant at Watson Wyatt in the UK, said this confidence is built on a “covenant”, he suggested – the ability and preparedness of the employer to fund current benefits and make good any future deficiencies, “The covenant is the ability of the sponsor to act as the ender of last resort,” he said.
This will have an impact on investment strategy. “A strong covenant widens the range of appropriate investment polices. A weak covenant narrows the range of appropriate polices to more cautious ones.” Ultimately good decision-making depends on the freedom to make good decisions.