I was fascinated by reports of one of the more provocative talks given over the last few weeks was from a former chairman of the UK’s National Association of Pension Funds. Alan Pickering’s speech concerned the future of UK trustees. Given at a European Bond Conference in early April, Pickering, currently chairman of the European Federation for Retirement Provision and a partner at leading consultant Watson Wyatt, apparently called into question the ‘Anglo-Saxon’ trust-based system. Apparently, Pickering argued at the conference that the UK government was trying to make lay trustees deal with too many complex issues.
I don’t necessarily agree with Alan about the reason. It is not so much the government that is trying to make trustees deal with so many issues but the nature of pension funds themselves. It has concerned me for some time that the UK pension trustee system has proved itself ill suited to the job of guardian of the UK’s pensions’ wealth.
Pension funds have become increasingly complex and the investment instruments available to fund them beyond the knowledge of the average man in the street. For too long the UK pension system relied on an excessive investment in UK equities for no good scientific reason. I believe it really was no more a happy accident of history, if you like, a glorious coincidence of circumstances, that funds held most of their money in UK equities by the late 1970s, throughout the 1980s and well into the 1990s just when those very equities produced returns in excess of what pension funds actually needed. It really was difficult to justify on any sort of proper risk analysis the heavy equity weighting that most pension funds held. Equity investment and especially equities in the UK over this period benefited more than most other instruments from the Thatcher administration and her legacy.
However, as a result, I believe most pension fund trustees became complacent and relied on the common fallacy that because an idea has served you well over a period of time you should continue to rely on it. Whilst pension funds in the rest of Europe took investment of pension fund assets rather more seriously, with the Dutch in particular leading the way, the British might be said to have fallen asleep at the wheel.
It has, for example, been quite clear over a period of years now that pension funds in nations new to pensions funding look to The Netherlands for their lead. London may have the lead in investment professionals, just look where most money is managed but I believe it is the Dutch pension funds who know best how to ensure their assets are well managed.
It really is so ironic that, whilst the City of London produces so much expertise, the UK continues to manage its pension fund industry by relying on such a Victorian, some might say anachronistic, system of governance.
However, the UK trustee system need not be scrapped. The very best schemes already show that it can work but in the main it certainly does need to be professionalised. It would be a great pity, if, after all these years we changed too radically. But we do need to change. Let the UK look at how other countries do things. There are lessons to learn. I am delighted that many pension professionals are moving into trusteeship on retirement, but I am worried that many professionals see trusteeship as simply a nice way of enhancing their pension. They really must take it more seriously than that and the same is true for both employer and member nominated trustees. Gone are the days when a personnel or finance director could simply pick up trustee meeting papers and waltz straight into a trustee meeting without having done any homework.
And yet trustees are still concentrating on many of the wrong issues, or rather spending too much time on the issues that matter least. Anyone who has attended trustee meetings knows all too well the time that is often wasted looking at the individual investments made by a fund manager. Even the appointment of one fund manager against another may have too much time devoted to it with far too little time devoted to the asset allocation strategy of the pension fund itself. I do however get the feeling at last that this is changing.
If it isn’t a contradiction, I think trusteeship should be a full time part time job. By that I mean that anyone who serves as a pension scheme trustee or as a director of a trustee company should devote considerable time and resources to the position – they need to educate themselves and, paraphrasing Paul Myners in his famous report, make sure that they are really familiar with the subject and get themselves up to date. There are some people who are trustees today who should not be trustees. Maybe we do need trustees to pass exams, we certainly need many more better educated trustees. A number of pension schemes are probably not very well served by the trustees they have now.