UK - Trustees of UK defined benefit (DB) schemes need to enhance their investment decision-making processes, including more efficient delegation, to allow them to focus on key issues such as funding, strategy and risk, according to research from Russell Investments.
Its survey of 200 UK DB schemes, ranging in size from less than £99m (€111.2m) to more than £1bn, suggested that despite increased complexity of investment, a rise in scheme closures and more pressure on funding, the trustees' decision-making model in many schemes has not "materially changed" over the last decade.
Russell Investments noted that "investment committees remain in the minority, powers of delegation are not being exercised, and the quarterly meeting cycle remains the dominant structure for managing all decisions. Therefore, a ‘governance gap' has been created."
Figures revealed 59% of schemes do not have an investment committee, despite it being a key recommendation from the Myners Review. And while this situation is more common in schemes with less than £100m, where four-fifths do not have a committee in place, two in five large schemes are in the same position.
Sorca Kelly-Scholte, director of consulting and advisory services at Russell, said: "Poor governance costs funds up to 3% per annum, so we wanted to get a clearer picture of typical investment governance structures."
Almost half of respondents, including trustees and internal pensions managers, revealed they spend more than 25% of trustee meetings on investment matters, even if they have an investment committee, which could indicate trustees are either focusing on the wrong decisions or effectively repeating the work of the committee.
In addition to potentially inadequate delegation, the study highlighted the confusion over who is responsible for certain investment decisions, with 16% of schemes stating the adviser or actuary is responsible for setting the investment strategy, and three schemes claiming these parties have sole responsibility. Over 90% of respondents also claimed to be good at obtaining investment advice, but the firm warned this could indicate "over-reliance" on advisers to drive decisions.
That said, 40% of the schemes admitted to being less confident in their ability to respond quickly to new situations, which Kelly-Scholte said "seems a critical characteristic of any effective decision-making system".
The firm also highlighted the "mismatch between provider hype and market confidence" on the issue of fiduciary management, which could be one way to address governance gaps.
Only 25% of schemes admitted to having some knowledge of the fiduciary management concept, with just 13% of respondents actually using it in some form. However among schemes with assets of more than £110m, 9% use some form of fiduciary management and the figure was 15% for schemes valued at less than £100m.
Figures showed that 21 of the 25 schemes currently using fiduciary management or implemented consulting are 'very' or 'fairly' likely to use it again, while only 5% of the remaining schemes plan to adopt the model in the next two years. This led Russell Investments to conclude that if governance structures are to evolve, "further education is needed on new models to help trustee boards give more informed consideration to the different structures available".
Kelly-Scholte added: "It is clear that providers have so far failed to present the approach to the marketplace coherently, leaving funds uncertain of the proposition and understandably circumspect about its usefulness."
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