Command, control and organisation
Gail Moss outlines the duties of the investment committee chair – one of the most influential positions in a pension fund
Most large pension funds now have an investment committee, which is responsible for defining the fund’s investment policy and for seeing it is carried out. The chair has overall responsibility for driving the committee’s agenda.
Academic literature has shown that more than 90% of the performance of an investment portfolio can be attributed to strategic asset allocation, which assigns a crucial role to those charged with setting and monitoring it. In many cases this is the role of the investment committee.
But the way in which the committee carries out its role varies between pension funds. Some committees can take major decisions, for instance, on changes to investment policy. Others can only give advice to the trustee board.
The governance environment of the committee can also vary according to the country, while different pension fund structures will dictate different approaches to governance. However, there are many common features, which are outlined here.
Conduct of meetings
One of the investment committee chair’s functions is to set the strategic agenda, and bring members to agreed decisions.
Meetings should take place only when they are necessary, notes Chris Ford, head of investment for EMEA at Towers Watson. “Regular – say, quarterly – meetings should avoid critical decisions and focus on strategic management. Critical decisions should be made when circumstances dictate, not on a specific date,” he says.
What takes place before and between meetings is also important. “The chair should have a regular dialogue with the CIO or fiduciary manager as to what the current and strategic concerns are, possible action to be taken and whether that changes the agenda for the next meeting,” says Ford. “The chair should get feedback on what is happening in the market, so it can be embedded in his or her thinking. The CIO can, in turn, be made aware of what the chair is thinking from a strategic point of view. We all perform better when we have this kind of regular informal contact.”
The chair should set a clear agenda for each meeting, with options for action where needed, including their own preferred plan. They should lead, but not dominate, the discussion, pointing out the risks of various courses of action, and how these can be managed and monitored.
“It is important to let everyone have their say,” says Marsha van Beusekom, senior investment consultant at Aon Hewitt in the Netherlands. “The quieter committee members should, if necessary, be drawn out by direct questions. The chair should ask them, if necessary, repeatedly, if they understand what has been decided. Often, people agree to things they don’t understand.”
The chair should be prepared to steer the committee back if it drifts off the point. Once a decision has been reached, the chair should ensure there is clear documentation to show what the decision is and why it was made. This will act as appropriate back-up when the committee informs the board.
Managing committee members
The chair should keep an eye on the performance of the whole committee, and of individual members. All play a role and should be assessed in the same they way they would be in their full-time position.
Specific questions include:
• How well did the committee perform at each meeting?
• Is the whole more than the sum of its parts?
• How well did each individual interact with other people in the group?
• Is each individual the glue binding the committee together – or are they grit?
Gaps in knowledge or skills can be addressed by group or individual training.
“There are often committee members who do not work in a finance function but who are making financial decisions,” points out Carl-Heinrich Kehr, principal for Mercer’s investment business in Germany. “In some [German] pension trusts it is required that these people acquire and maintain a certain level of understanding with regard to the specifics of pensions management. This can be achieved by formal training courses offered inside or outside the scheme. In a few pension trusts, progress is tracked.”
In the Netherlands, investment committees often include representatives of the sponsor company’s workforce, and there is a legal responsibility to set up training for every member. Generally, if training does not bring an individual’s skills up to the standard needed they may have to be replaced.
Education can also be carried out at a more general level. “Some schemes try to keep their asset managers at a distance, while others engage with them in order to learn,” says Kehr. “Asset managers, like other service providers, can be a useful source of new ideas. Again, the investment committee chair can be instrumental in reaching out for strategic advice in a systematic fashion.”
Problems and how to solve them
• It can often be difficult to get committee members in the same room for meetings, especially when decisions have to be made quickly.
Conference or video conference calls can be just as effective in agreeing an action plan. But the chair should still make a point of asking everyone’s opinion.
• Where opinions vary on a particular topic, the chair should find points of commonality. Once that has been achieved, he or she can then gradually raise the quality of the process to come to a decision.
It may sometimes be necessary to get a majority decision rather than complete consensus; in this case, the chair should ensure committee members are comfortable with this, if necessary, using their powers of persuasion. If there is still some disagreement, it may be best to remain with the status quo for the time being.
• Problems can often arise when committee chairs and members – for example, union representatives – are in day jobs bearing little relation to the investment function. This can mean they feel torn between two opposing poles.
The chair may also suffer simply from overload. “As committee chair, your job is to think strategically, not to worry whether the photocopier on the second floor is working,” says Ford. “In this situation, they should simplify their agenda to give them time to focus on the right things. For example, they could cut out fund manager presentations, which can take several hours but are pointless because they are looking at past, not future, performance.”
• In some trust-based structures, pension board and committee members can be exposed to personal liability, but individuals may not always be aware of this. “In this case, the roles of investment committee members should be defined, and the pension scheme – including an investment committee if it exists – should have a crisis plan in advance,” says Kehr.
“This could include how to deal with extreme events on financial markets and events affecting the ability of the scheme sponsor to meet its obligations; it could even cover finding administrators to take over the assets and meet obligations to beneficiaries. The chair of the investment committee should ensure that such a plan is in place.”
Relationship with fiduciary managers
If appointed, a fiduciary manager reports to the investment committee which, in turn, reports to the board. “The committee chair’s role is primarily a leadership job, but also often an executive job,” says Ford at Towers Watson, which itself offers fiduciary management services. “The problem is that the leadership role often gets crowded out by operational matters. So if there is a CIO, they and their team should be able to take on more of the executive burden, allowing the investment committee chair to focus on the strategic investment agenda.”
Appointing a fiduciary manager can take away much of the operational burden.
In the Netherlands, for instance, a fiduciary manager would usually give strategic advice and can use external funds.
Either way, the existence of a fiduciary manager does not make the role of the investment committee redundant.
“The investment committee is needed to take responsibility for the overall investment policy, ensuring the fund can pay its liabilities in the short and long term,” concludes van Beusekom. “Fiduciary managers can give strategic advice, but not make those decisions for them.
“In terms of governance, it is also, for instance, up to the investment committee to decide whether fund managers should be monitored by the fiduciary manager, or an outside party such as a custodian. Ideally, the investment committee should be getting its own advice on these issues from independent consultants.”