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Impact Investing

IPE special report May 2018

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Structural importance

Although not a legal necessity, committees are important to the efficient running of pension schemes. Gail Moss looks at their requirements and role

For many pension schemes, committees are the central structure enabling them to function efficiently. The body responsible for trust-based and other occupational schemes is the governing (or trustee) board. This committee may be supplemented by others, such as an investment committee, whose main purpose is to expedite the pension scheme's business in between board meetings, leaving the board to concentrate on strategy.

These committees have more or less autonomy, depending on terms of reference. However, not all pension schemes use a committee structure. With a contract-based arrangement, there is no obligation even to have a governing board, in Germany and Austria, committees act as the scheme sponsor's agents.

What committees are needed?
Over and above those required by law, or scheme rules, it is for the governing board to decide what committees it needs.

"It depends on the fund's size and structure, and also what problems the board wants solved," says Peter Kraneveld, owner of the Netherlands-based consultant PRIME. "A fund governed by an executive bureau doesn't need committees. A board that lacks qualifications needs a committee."

Kraneveld says that committees should not be seen as requirements, but as solutions. "So first you need some sort of common understanding of where the board needs help," he says. "That's difficult, because boards tend to see themselves as better than they are. An outside assessment of the board may help."

The most common committee is the investment committee, because of the fast-moving, technical nature of asset management. Other committees are often set up to cover risk, governance, auditing, administration, communications and the pensions agreement.

And where a DB section of a scheme is being closed, with employees joining a new DC section, some trusts are now setting up DC committees. This is because DC schemes are often allotted just a couple of minutes at the end of an agenda, given the DB scheme is more problematic for trustees and sponsors. Setting up a separate committee allows DC schemes to receive due care and attention.

Of course, in addition to the standing (permanent) committees covering more technical areas, pension schemes can set up ad hoc working groups to deal with specific issues as they arise, such as fund mergers.

Who should be on a committee?
For many funds, committee composition is determined by law or the trust's deed. In the UK, for instance, a third of the board must be nominated by members. However, there is flexibility to ensure that these people have the skills and personality to do a good job.

Where positions are nominated by members, the board can aim to select the best candidate by advertising the role together with a job description, ensuring candidates consider whether they have the skills and commitment before they nominate themselves. Candidates should also be made aware of the fiduciary nature of the board member's role.

Governing boards can similarly influence the nomination of board members by the employer. Before doing so, however, they should consider what skills they need to provide a balanced group - likely to be skills that are lacking, or need strengthening, within the existing board. They should also remember that different skills are needed for DB and DC schemes.

Financial acumen is obviously a plus as investment decision-making is becoming more complex. But also important are communications skills, and competence at relationship management. Pension schemes have relationships with their members, the scheme sponsor, and the external advisers.

"Boards need to manage their advisers well," says Rachel Brougham, principal at Mercer. "They should be proactive, especially in discussing what's working well and what isn't."

Brougham adds that certain skills can be brought in if no-one is found to represent them on the committee - for example, the sponsor's own risk team can aid the risk management process. For committees dealing with areas such as investment, the pension fund's regular adviser would be an obvious choice, but the board could also appoint some additional external expertise.

Kraneveld suggests that members are appointed for a limited period, and evaluated at least annually. He warns that a common pitfall is appointing committee members who are not trusted: "This could be people appointed for ‘political' reasons, as a compromise, or as thanks for past services."

Role of the chairman
The chairman of any committee is not there just to ensure impartiality and the agenda is adhered to. They also set the tone, and should encourage a culture where members are expected to ask the right questions, however basic, in other words, no question is a silly question.

The chairman should also ensure that there is enough time to cover each item of business, preventing committee members from getting distracted. It is also their duty to ensure strong personalities do not dominate the proceedings.

A poor chairman can be difficult to deal with, but a self-evaluation survey for committee members can identify a problem to be tackled. Other ways of getting feedback include using advisers or the scheme sponsor. "Some sponsors appoint chairs, and we are seeing more and more independent chairmen of trustees," says Brougham. "Some chairs are reviewed under the terms of their appointment."

Terms of reference
The key to effective committees is clearly articulated terms of reference. For committees set up by the board, the main questions are what has been delegated, what the committee is expected to do, and how it is expected to report.

Some committees merely carry out research on a particular topic (such as investment strategy) and return to the board with recommendations. Once the board has made a decision, it may then delegate implementation to the committee. Other committees may be given the power to make their own decisions. The important thing is to make clear what the committee is, and is not, allowed to do. Committee members should, however, be given full access to information and staff.

Performance measurement
Defining and measuring performance is a necessary tool in gauging a committee's effectiveness, although some areas are more easily measured than others.

Where performance is measurable, the committee could determine its targets, then compare actual performance against this.

Another approach is self-evaluation, with committee members completing a questionnaire or taking part in a discussion.

Alternatively, outside consultants could be used to manage the exercise as part of a formal effectiveness review. This can be helpful where the consultant observes a meeting, especially if they assess such sensitive areas as where the power lies between the committee members. The pensions department can also help in this process.

The scope of the evaluation should be agreed with the committee chairman, who can also suggest areas of particular importance. General issues to be looked at include:

• Is there the right balance of individuals on the committee?
• How are meetings run?
• How does the committee work together?
• What works well, what could work better, including key relationships and decision-making processes.
• For individual members, performance criteria could include being present, being prepared and participating.

Effective decision-making
It may sound trite, but good decisions arise from a good decision-making process. So the governing board, or relevant committee itself should be asking: what is our remit? What do we want to achieve? Do members need advice or training?

The work needed to collect information on which to make a decision will vary, as will the time taken. But once this information is available and the committee meets to consider it, members should make sure there is enough time for a proper discussion before reaching any decision.

Furthermore, the committee should be satisfied that it is aware of all the available options, and why these are being discounted. The discussion, together with the supporting information, should be documented.

Once a decision has been made, the committee should monitor the outcome: how has it worked out over the past year, and can it still be justified?

For example, the pension fund may have set up a communications strategy to encourage higher take-up of a particular scheme option. Has that higher take-up happened? If not, why not?

Decisions are more likely to be reviewed if they were wrong, but it is important to look at how successful decisions were made, to replicate the process elsewhere.

Monitoring not only includes a review of past decisions, but also an ongoing vigilance with a view to taking avoiding action before things go wrong.

Committees should be clear about what elements of performance they are monitoring, and why. They need to identify the trigger points where action will be taken. The most obvious example here is the different aspects of investment strategy, for instance asset allocation or the appointment of external managers.

"It is too late to take action once performance falls off a cliff," says Brougham. "So the committee should decide how far and for how long performance can slide before they take action. They should also decide which person or organisation will take the action."

A less obvious but equally crucial area to monitor is the sponsor covenant in DB schemes - the sponsor's ability and willingness to give financial support to the pension scheme.

Common problems
Sometimes, meetings are not frequent enough - for instance if they are held quarterly. In this case, committee members can either meet more often, put pressure on advisers to speed things up, or delegate business to a third party, for instance via fiduciary management.

In any case, there may be areas - such as investment - where events move too quickly for opportunities to be taken, or threats to be protected against.

Where the pension scheme runs several committees, the board must ensure that the committees do not operate in complete isolation, says Brougham.

"The board needs to have an overview of the whole operation to ensure that nothing slips between the cracks," she says. "This may mean direct liaison between two separate committees over the same issue."

Another problem is that individuals who are not on a committee can feel left out, especially if they possess the relevant expertise. This can be tackled by rotating committee membership.
 

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