Pensions committees – are they really working?
0A busy few weeks has seen me struggle to find some time for blogging but I’ve now managed to set aside an hour or so to put fingers to keyboard to write another entry. I thought I’d return to a topic close to my heart that I mentioned (albeit briefly) in a previous blog – that of pensions committee meetings. Some of you who know me well know that I harp on about this, but I do so for some very good reason.
Firstly, I should state that I’m a big believer and supporter of the ‘lay person’ model of fund governance that is the standard for the LGPS. Committees comprised of non-experts are an effective brake on what the experts might otherwise get up to, and should (in theory) result in the jargon laden world of investments being, well, less jargony – as investment professionals who work with non-experts have to focus on explaining strategies, products, performance and approaches to an audience of lay people. If they’re any good, they should be able to do this, or at least know someone who can!
I also believe that elected members’ work on other committees – planning, licencing, financial, for example – is also relevant for the governance of pension funds. If nothing else, it seems to give members the ability to sense when not everything being presented is quite as it seems. All good so far.
What’s my point of this blog on pensions committees? Well, for the most part, I don’t think they work very well.
Setting this slightly inflammatory statement aside for the moment, I’d ask you to think: what’s the purpose of a pensions committee and what are its main functions?
Might I suggest the following as the main investment functions or responsibilities (non-investment matters are not my area of specialty, so I’ll leave them alone for the moment):
- Setting and reviewing investment strategy relative to the fund’s liabilities, considering a wide range of asset classes and investment management styles
- Monitoring investment strategy on an on-going basis, making adjustments where necessary
- Overseeing the appointment/monitoring/review of investment managers, custodians and consultants
- Ensuring all members on the committee are suitably trained and supported
- Ensuring there are sufficient internal resources to manage the fund
Clearly, there’s more to the job than this, but for a short blog I thought a short list would be ok.
If the above is a reasonable starting point of the key responsibilities, how many pensions committees can currently say these responsibilities are being successfully completed?
In my time in the LGPS, I’ve attended quite a few pensions committee meetings, and most do not tick off the items on the above list. Why not?
Is it because of one (or more) of the following:
1) A ‘this is how we do it’ influence – how many committees have gone back to basics and considered afresh what exactly their remit should look like? Or is it simply a case of ‘we’ve always done it this way’? In some places, formats of meetings have not changed for many years – which is fine if they are delivering the key objectives. But how many committees have clearly set out their key objectives, and how they can be effectively measured?
2) Turnover of members – an unfortunate consequence of democracy! Many good intentions are thwarted with the regular turnover of pension committee members, following local elections. This has an obvious impact on collective knowledge and decision making, and places a heavy training requirement on those responsible for the administration of the fund.
3) It’s all about the managers – by far the biggest problem I have with the current ‘typical’ approach is that too much of the precious governance budget is spent on investment managers. And not even on carrying out on-going monitoring of all of the most important aspects of the investment management firms that administering authorities employ – but time spent on simple quarterly updates of performance. Hours are spent every year discussing the merits, or otherwise, of individual stocks – not good at all.
For years now I’ve tried (pretty unsuccessfully I must say) to ask various committees to consider doing things differently, to spend some time reflecting on what they are trying to achieve via the pensions committee structure, and considering whether things could be done better. Here’s what I’ve suggested, and continue to suggest when asked:
1) Back to basics – spend an hour just asking some questions about the purpose of the committee, what its key objectives are, and how success or failure will be judged. Essentially, the blank piece of paper test – so simple, and so effective.
2) Elected member training – to carry out effective training, you need to know where you’re starting from, so an assessment of current knowledge seems a good place to being. This should be followed up with a tailored training plan, which helps Elected Members – newly appointed or otherwise – get to grips with the nature of pension fund investments, regardless of the level of their existing investment knowledge.
3) Monitor managers properly – preferably via a sub-committee/panel, but if the main committee insists on doing this, then more thought needs to go in to what the managers are asked to cover in their presentations to committee, how long they are given to present, and what the committee want to ask the managers on a regular basis.
4) More time on strategy – this is the one thing that has the most impact on whether the fund will be successful or not (i.e. closing deficits/improved funding level, and ultimately paying pensions). Surely strategy deserves a whole day to itself on an annual basis? Many elected members do not like, for example, hedge funds. But how many of these same elected members have spent a reasonable amount of time considering them as a possible addition to their fund’s investment strategy? And what about medium term changes to investment strategy? How are they dealt with?
Valuation results in England and Wales will be due next year – probably towards the end of 2013. Focus will then switch to formal reviews of investment strategy. There’s a golden opportunity between now and then for funds to undertake a root and branch review of their governance arrangements, so that they’re in great shape to deal with what may well be one of the most challenging strategy reviews they have faced.
Let’s not miss this opportunity to show the LGPS as a beacon of great governance in challenging financial times.
David Crum spent 11 years working in the LGPS for the Lothian and Strathclyde Pension Funds, and 5 years as an investment consultant with Aon Hewitt. He is now the founding Director of 330 Consulting Limited
