Pension trustees have access to better education and training than ever before but, say observers, in an increasingly complex investment world, they may never have enough knowledge. Maha Khan Phillips reports

Four days a year. That’s the figure one UK employer provided to a prospective member-nominated trustee, when he asked how much commitment being part of the group that manages the company’s pension fund would take.

His response illustrates the depth of the problems trustees say they are grappling with. The demands of their role are often under-estimated by sponsoring companies - particularly in the case of smaller schemes - and legislators. While initiatives in the UK and elsewhere go far, many lay trustees say they need more support. More and more, training providers are offering it.

Steve Delo, chief executive of the UK’s Pensions Management Institute, who overheard the conversation between the employer and the prospective member-trustee, believes suggesting that the requirements of the role could be fulfilled in four days a year is ludicrous.

“The trustees may meet four times a year but the work, research, personal development and sheer volume
of reading they should be doing to support this will be vastly in excess of this time.

“I suggest that a day a week is a better estimate of the real minimum time trustees should be spending on their role. And how many employers do you think will support this time away from the day job?”

Access to knowledge

It is no surprise then, that research from the UK’s Pensions Regulator reveals that one-third of British pension funds still do not offer any training to their trustees, while four in 10 of the schemes do not have any risk management processes in place.

However, things are getting better. The proportion of schemes offering no structured training in the 12 months to July 2007 decreased from 45% to 30%. Smaller schemes were the worst at training. A total of 61% of small DC schemes had not offered any training over the year.

For trustees, there is now a plethora of providers offering training programmes. Some offer it because it is part of their mandate and others, because they can profit from it.

The Pensions Management Institute in the UK offers certificates and training courses that are proving extremely popular. Delo says there has been a large uptake in courses. The PMI Awards in Trusteeship, which were launched last autumn, now see almost 400 candidates sitting the exam. Trustee seminars run twice a year are consistently popular, he says.

In the UK, The National Association of Pension Funds draws up similar courses, using the expertise of industry specialists. “There is a growing industry of more bespoke training now. You still have courses which are more general but trustees are increasingly looking for solutions that apply to their schemes,” says David McCourt, policy adviser on investment and governance at the NAPF.

Asset managers, pension funds, investment banks, consultants and smaller independent advisers are all running training courses ranging from better management to building specific investment knowledge in a specialised product, like derivatives.

But critics say a lot of the training on offer has to be taken with a pinch of salt. One investment banker admits that his advice comes with a price tag. “I’ve done quite a few presentations on the use of derivatives in pension funds. While I hope I’m providing good information, it is slanted towards a product sale. Trustees have to understand that the objective of providers is to sell them products. Even consultants have an agenda, and that is to make things look complicated so they are retained and used repeatedly,” he says.

Delo agrees that trustees need to be aware of what they are being sold. “Nobody in the pensions industry is doing this as a hobby. There is nothing wrong with that, but it is important for trustees to bear in mind that the job of a fund manager is to secure assets, hold on to them, and charge an ad valorem fee. The job of a consultant is to sell time at a few hundred pounds an hour.

“If a trustee remembers that, they can keep their resources focused on the advice and products that matter for their scheme, not simply doing stuff that the fund manager or adviser has ‘sold’ them for their own business reasons.”

Unsurprisingly, consultants say the comments are unfair. “Trustees do need to understand the alignment of interest that there are with service providers. But there are differing degrees of that. Ultimately, providers do well if their clients do well,” argues Noel Grant, senior investment consultant at Watson Wyatt.

The UK’s Pensions Regulator (TPR) has launched an e-toolkit that covers investments and sets out issues trustees need to consider in their role. At least one trustee at the majority of pension schemes (70%) has used the toolkit, says the regulator.

But even with the advice on offer, trustees believe they are facing a difficult task.

“I embraced the e-toolkit very enthusiastically but found that it wasn’t interactive enough. I used to dip in and out of it from time to time but, like so many things, I found it had been dumbed down, and wasn’t particularly what was needed,” argues a former member-nominated director, who recently left her position.

She says trustees need time and support to do their jobs. “Employers say they will support you but in reality they don’t really even want to keep their pension schemes. The rhetoric is that they’ll give you support but you don’t get it. This is an extra burden over and above your job.”

She also believes that legislation in the UK has not helped. “Trustees are now personally responsible but it isn’t clear how much we are meant to be responsible for in terms of knowledge,” she says. “I am an avid reader, for instance, and often find myself pointing out things in presentations that hadn’t been thought of or mentioned. To what level are we supposed to question the information we’re given?”

Under current UK legislation, trustees must have the relevant knowledge and understanding to perform their roles. They must identify any gaps in their knowledge and make sure they undertake the necessary training. However, there is no
guidance in legislation specifying what that knowledge needs to be.

TPR says its guidance notes should
be enough for trustees to understand their roles. “The regulator expects trustees to review their knowledge regularly. We have produced scope guidance in consultation with the industry, which sets out what trustees should know and understand,” says Amy Balchin, spokesperson for TPR.

Others say it is not that simple. The investment industry is moving so fast that even with training, trustees would have a difficult time catching up, says Chris Edge, chief executive of AllenbridgeEPIC Advisers. “I fear that the sophistication and expertise trustees need has outpaced their education. So many trustees have got behind the curve simply because the level of sophistication in investment
has never moved as fast as it has in the last five years.”

Meanwhile, Watson Wyatt warns that TPR will fail to deliver its risk-based approach to regulation if it believes investment governance of work-based pensions will improve as a result of increased trustee knowledge and understanding alone.

“We welcome the fact that governance features highly among The Pensions Regulator’s priorities for the next three years. However, based on our research, many investment strategies are out of kilter with funds’ governance arrangements and this ‘gap’ cannot in most cases be bridged through training alone because of increasing investment complexity,” says Paul Trickett, European head of investment consulting.

Watson Wyatt argues that only 40% of UK pension funds have investment strategies and governance arrangements that are aligned. “We believe the destruction of value through unsuitable investment strategies can be avoided if pension funds are honest with themselves about their governance capabilities and organisational effectiveness first before embarking on complex investment models involved asset diversity and skill-based strategies,” he added.

Not everybody agrees. Edge, of AllenbridgeEPIC, argues that smaller pension funds would have a hard time generating the returns they require without using more complicated investment products. It is not possible, he argues, to match your liabilities with equity and bonds any more.

Watson Wyatt’s Grant says overcomplication is part of the problem for trustees. “If you’re a small scheme or a relatively unsophisticated one, you should look to do things on a passive basis, and manage the things that are in your power. So you should manage costs down as much as possible. Costs are a much larger proportion of returns than anybody expects. The costs will be what they are, but the returns you get from investment opportunities are never in aggregate as high as you expect them to be.”

Asking the right questions

Many industry participants believe training should emphasise decision-making, rather than specific product knowledge. “Lay trustees need to be trained in how to govern, and about when to let go and when to pass things to experts. It’s easier to train six lay trustees in how to govern than it is to make them pensions experts,” argues Andrew Drake, who heads the UK pensions business at Morgan Stanley.

He provides the example of what happens when you replace an equity fund manager at a pension fund. Nobody knows when is a good time to sack a manager. Sometimes, the decision works in your favour. At others, the manager goes on to make stellar returns.

As a result, trustees can only be judged on the quality of their decision making at the time. If a manager outperforms, but cannot explain why, then trustees would be right to replace him, even if it means less performance in the future.


European models

Many industry participants turn to Continental Europe to provide the best of breed model for trustee development. “Some countries are trying to work on the competence of the board, rather than expect everything from a trustee,” says Georg Inderst, an independent trustee. “The UK has not gone down that route, and I don’t know quite why. It would be better if you could have a board with one or two people who understand investments, someone with an actuarial background, and someone with a legal background, for example. They would have the mix of expertise required.”

Different countries have adopted different strategies. Switzerland’s pension fund association, ASIP, is onsidering quality screening of the education institutes that offer training to trustees and pensions managers. Christoph Ryter, ASIP president, told IPE in May: “There is a legal requirement for retirement schemes to pay for the education of their executives and our organisation is looking at how to support schemes in that process.”

Ireland’s Pensions Board is also reviewing education. It published its Report on Trusteeship in February 2007, which is open for consultation. “We’re planning next year to produce an e-learning module, like the trustee toolkit in the UK. We think it’s an excellent product, and I’ve been talking to some of our colleagues in the UK about the thinking and processes behind it,” explains Angus Horgan, assistant head of information.

Among other recommendations on the checklist are that employers should automatically arrange trustee training for all trustees within six months of their appointment, and at least every two years thereafter. Trustee trainers should be encouraged to hold regional trustee meetings.

The board has also produced a checklist for employees in relation to on-the-spot fines. “There are certain laws within the Pensions Act and if you don’t follow them, you can be prosecuted. In relation to on-the-spot fines, we’re looking at specific areas like disclosure of information. If the trustees don’t do certain things they can be fined €2,000 for each offence and each trustee. So five trustees would be fined €10, 000,” explains Horgan.

It is such pressure that trustees, particularly in the UK, are grappling with. “100,00 trustees can’t all be expected to do a PhD in investment. This is a political and social issue as well. You expect half of trustees to be member nominated, but people have other jobs to do,” says Inderst. It is, he suggests, why other models work better.

In Denmark, for example, no changes in the legislative framework of a pension fund, such as statutory benefits, can be made without the acceptance of the delegates/members at an annual general meeting. But a delegate, who is voted in for four years, does not make investment decisions. “All such decisions are made by the board or by the board of directors according to a set of closely defined authorisations from the board to the board of directors. Both can be held responsible,” explains Claus Skadhauge, head of communications at the €14bn pensions group PKA.

PKA has invested heavily in training and educating delegates. There are almost 800 delegates in the eight pension schemes, and they have to decide on benefit structures, the adoption of annual reports and accounts. They are also involved in discussions of the investment strategy.

But, says Skadhauge: “A collective body like the AGM can never be held responsible for investment decisions. What if someone voted against? What if someone did not turn up at all? What if someone was not even in the room during the voting? It is obvious that you cannot legally hold a collective body like delegates to the AGM responsible.”

Still, he says, PKA discusses its positions and strategies with its delegates. “A typical issue on the AGM’s agenda in PKA for more than 20 years has been ethical guidelines for the investments. All guidelines have been developed in close collaboration with members. Members may even have some general points about investing in real estate, buy-out funds, and regional allocation, for example. The boards listen to this and try to adopt it within the legislative framework.”

Whose responsibility?

So should the burden be taken out of the hands of lay trustees? In the Netherlands, final responsibility lies at the board, rather than the individual level. “Under the new [Dutch] Pensions Act, everybody agreed that board members were not educated enough to do their jobs. There is more than €700bn in pension funds in the Netherlands, and there were amateurs governing them. That was not good enough. But we didn’t want the government to make the decision about how much knowledge was required,” explains Peter Borgdorff, former director at the VB.

Instead, the association made its own regulation. A board member must have a minimum level of education that equates to roughly 12 days training during the first year of membership. The DNB can ask a board to prove that it has the requisite skills.

Mark de Wijs, a director at SPO Pensioenopleidingen, says exams provided by the SPO do not certify individuals or boards, but that “courses for the board and board members are certified. It’s what we call the polder model. In the Dutch system, we can’t choose so we go for the middle!” he jokes.

Still, boards can prove their capability by taking SPO’s exams, and identify any gaps remaining in knowledge. SPO has a “knowledge reflection system,” an internet toolkit similar to what is being offered in the UK. However, the group is also piloting a new product. “We’ve developed a simulated pension fund in which people participate as board members and get a role to play. They then get all kinds of documents which they have to prepare and know. We put them in a board room for a day and a half and they have to make decisions about the future of the pension fund. This process is monitored by professionals who can give them feedback.”

Though the programme is kicking off in April, De Wijs says the pilot went extremely well. “We are thinking about exploring the European pensions market and providing courses for a broad group of people.”

Critics say it is not possible to develop a one-size-fits-all approach but other global initiatives are also being tested. In the US, the CFA Institute Centre for Financial Market Integrity is compiling a code of conduct for trustees, which is open for comment. “Our code is pretty unique because it addresses all types of pension funds regardless of the regulatory scheme they are working under,” explains Jon Stokes, director, standards and practice. “We’re trying to make it globally viable. It’s not a cook book or a list of responsibilities, but it comes from the perspective of ethical responsibilities.”

Some trustees however, complain they are buckling under the weight of guidelines, which need to be more specific, rather than plentiful. “For a trustee group to get to a place where they are comfortable, they have to run pretty hard to stand still,” says Watson Wyatt’s Grant.

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