What makes an effective Trustee Board?
WHAT are the characteristics of a truly effective retirement fund Trustee Board? First, we need to ask what we mean by “effectiveness”. This must go beyond mere compliance with regulatory requirements.
A truly effective Trustee Board would be able first to specify a set of well-considered strategic goals, and then to give the Fund the best chance of achieving these goals in a cost-effective way.
Different Funds may have different goals – those for a defined benefit fund (where members’ benefits are calculated in terms of a formula, and the employer carries much of the financial risk) will be different to those for a defined contribution fund, which is really a savings arrangement in which all the financial risk is carried by the members.
But in all cases, setting suitable goals for the Fund’s investment strategy will be a key task, because the heart of Trusteeship is really to safeguard and grow the pool of assets which exist to provide benefits for members when they leave employment. Getting the right balance between security and growth is of course one of the main challenges for Trustees.
So, what does a Trustee Board need to make itself truly effective?
Ideally, the Trustees themselves would have the mix of all the skills needed to do the job. This would include financial and investment expertise, some legal knowledge, and possibly some actuarial training, among other skills. Also, ideally, the Trustees would have the time to deploy all these skills for the benefit of their Fund.
In reality, this almost never applies.
Many Trustees are elected to Boards because they have the confidence of their fellow employees, but without any specific qualifications. And few employers can really afford to commit the time of senior professionals to their retirement funds – their skills are needed elsewhere. As a result, the average Trustee has limited time and expertise.
Would training help? Sadly, Trustees often seem to begrudge the time needed for training sessions, and training often focuses narrowly on legal responsibilities. The FSB is considering ways to make Trustee training more effective, although we doubt that making Trustees write exams would improve things – it may just deter many people from becoming Trustees.
Of course all Boards should put more effort into developing decent training programmes, and should look at ways to encourage Trustees to participate in these. But it will not be possible to give Trustees all the skills they might need, through training. Trustee Boards will remain heavily reliant on outside expertise.
The Fund’s Principal Officer can play an important role here. The Principal Officer should focus on ensuring that the Fund achieves “operational excellence”. This includes full compliance with the letter and spirit of legislation and the Fund’s own rules, but does not end there.
The Principal Officer should help the Trustees to focus on strategic matters by looking after operational matters for them. One important aspect of this is ensuring that the Fund makes effective use of its service providers – administrators, actuaries and legal advisors, benefit and investment consultants, and investment managers, among others.
The Principal Officer can also help by identifying where decisions and their implementation are delayed by the internal processes of the Board or by other factors, and can look for ways to eliminate such “roadblocks”. Encouraging Trustees to delegate more in some areas may be one such way.
The Principal Officer may guide and advise the Trustees, for example in identifying and managing conflicts of interest, and will certainly assist in drawing up the agendas for Trustee business, but should not try to lead the Board, especially in strategic matters. That role should be reserved for the Chairperson of the Trustees.
The Chairperson is best placed to help the Fund achieve, or at least aim for, “strategic excellence” – true effectiveness, as we defined it earlier. So the choice of Chairperson is very important. In our view, it is generally not a good thing for Trustees to choose the Chair on the basis of seniority or status outside the Fund, or because it is “his (or her) turn”.
Michael Morrell, former Acting Director of the CIA, has usefully summarised the characteristics which he sees in one (but only one!) of the current candidates for the US Presidency: “Prepared, detail-oriented, thoughtful, inquisitive and willing to change her mind if presented with a compelling argument”. Trustees would do well to look for these qualities in candidates for their Chairperson.
The Chairperson must also have the “people skills” needed to manage debate among the Trustees, so that all views are aired without the debate becoming conflictual. This requires that the Chairperson shows respect for the other Trustees and, in turn, has their respect too.
All members of the Board (and the Chairperson in particular) should ideally have the following characteristics:
A fiduciary mind-set, and integrity and ethics;
A basic understanding of pensions and investments and the challenges facing pension funds;
A strategic outlook and an understanding of the concepts of risk management;
Enough time and diligence carry out the role properly;
Credibility with members and the Fund’s other stakeholders; An appetite to learn; The ability to challenge and also to adapt;
The ability to contribute to diversity and independence of thinking;
The skills of collaboration, negotiation, sound decision making and the ability to delegate effectively.
All Trustee Boards delegate some of their responsibilities – for example, no Trustees carry out the member administration work themselves, even if the Fund is “self-administered”. Similarly, there are no modern Funds where the Trustees themselves decide on the stocks and shares to invest in.
Delegation may include the use of multi-managers for investment management, or so-called “implemented consulting” where decisions on investment strategy or choice of investment managers are delegated to a specialist consultant to who receives a fee (negotiated to be fair in relation to the service provided and value added) for carrying out these responsibilities for the Fund.
Delegation will also include the use of sub-committees of the Trustee Board. In our experience, almost all Funds of any size operate through a number of sub-committees, made up of members of the Board. (Some Funds co-opt independent experts onto the Board or the sub-committees to enhance their mix of skills.)
To enhance the effectiveness of decision making, the Trustees should consider whether there are matters that can, routinely or on ad-hoc basis, be delegated to the sub-committees without being referred back to the Board for ratification. This requires that the sub-committee members are well chosen and have the confidence of their colleagues on the Board
Although there are almost always constraints on their time, Trustees must be prepared to put some effort into the role. This means preparing properly for meetings. Often we see agenda packs of several hun dred pages – it is not realistic for each Trustee to read and absorb every page, so Trustees should discuss and agree among themselves what they can reasonably be expected to do.
Sub-committee members should at least ensure that they are familiar with the material relating to their own committees, when dealt with at Board meetings. Again the Chairperson and the sub-committee chairs should be carefully chosen as people who will apply themselves to the reading and thinking needed.
In preparing for meetings, Trustees should evaluate the issues that will be discussed and note down questions they may have. It is often said that “there are no stupid questions” (certainly if you are well prepared!) – this is where effective use of professional advisors can help, by ensuring that the Trustees have a reasonable grasp of the key issues they are dealing with.
Trustees need to treat each other with respect. They should also be honest about their limitations as a Board, whether arising through lack of time or lack of expertise. Boards should be careful not to bite off more than they can chew – sometimes, simple low-cost and “low governance” strategies will be better than trying to implement complex strategies that the Trustees don’t fully understand.
The FSB’s PF130 governance circular sets out standards for good Fund governance, and requires that Trustee Boards go through a yearly performance assessment. This is often a self-assessment process – unsurprisingly, Boards are inclined to give themselves high marks! It may be more effective to ask an outsider – not one of the Fund’s regular service providers – to carry out an appraisal of the Board from time to time.
We believe that Trustees who try to adopt the principles set out above will have a better chance of making their Funds truly effective. In the questions that follow, we ask the investment managers their own views on better decision-making, not just in their own businesses but by Trustee Boards too. There are some useful and thought-provoking comments, which we hope you will read and benefit from.
Erich Potgieter and Christina van der Breggen, Willis Towers Watson August 2016