Trustee boards stand to gain a lot by adopting a more challenging stance with their advisers finds Helen Morrissey.
- Concerns have been raised that trustees are not challenging their advisers enough.
- Advisers should be able to deliver key points of strategy in a way trustees can understand.
- Trustees should question whether the investment strategies they are put into are right for their specific scheme.
Scheme advisers such as consultants, accountants and lawyers play a vital role in helping scheme trustees run a sustainable scheme. However, the level of influence these advisers exercise has been called into question with concerns raised in recent months as to whether trustees challenge the advice they receive from their advisers in a robust fashion.
Speaking at the Professional Pensions Defined Contribution (DC) conference, The Pensions Regulator's executive director of DC Andrew Warwick-Thompson reiterated concerns that trustees may not be managing their advisers effectively.
"We have seen instances where trustees are not willing to challenge their advisers and in these cases you have to ask who is really running the scheme here?" he said.
It is useful to remember that good advisers want to be challenged. They are happy to have a debate and so trustees shouldn't be reluctant.
Barnett Waddingham partner Danny Wilding agrees trustees could be doing more to challenge their advisers: "It is an interesting area and I think some schemes are doing this better than others and so while I think things are getting better there is still plenty of room for improvement," he says.
Wilding advocates trustees developing closer working relationships with their advisers if they are to get the most out of them.
"It is important to meet advisers face to face on a regular basis and not just accept their reports at face value," he says. "Important information needs to be delivered in person."
Level of detail
Wilding believes clear communication is all important in developing a robust trustee/adviser relationship. He points out that sometimes trustees can feel overwhelmed with the amount of information delivered to them but that good advisers should be able to deliver the key points of their reports in a way trustees can understand.
"This is especially the case with things like actuarial reports which contain a lot of technical detail and lay trustees cannot be expected to understand everything," he says. "The adviser should be able to deliver the key points so trustees understand why things are being done. If you challenge them and you find they can't explain the key issues in a way you can understand then that is not good. Doing the technical work is not the only part of the adviser's role -they need to be able to explain it clearly as well.
"The result of this is that trustees should not be surprised by any of the risks that might arise from this work as advisers should have gone through the key things that could go wrong with any new strategies. So for instance with employer covenant the trustee board needs to understand what factors might affect the employer's business. There should be no surprises."
According to Wilding such an approach can empower the trustee board and can build a more constructive adviser/trustee relationship.
"This puts them in a position where the trustees can monitor these issues themselves which means they become less reliant on their adviser," says Wilding. "Indeed with things like employer covenant you can find trustees assist the advisers in being able to flag issues the advisers may be unaware of with the employer. Good trustees are already doing this."
Following the herd
Such an approach can also pay dividends when it comes to implementing new investment strategies according to Clerus founder Henrik Pedersen. Like Wilding, Pedersen believes advisers need to make it clear to their clients why certain investment strategies have been chosen as well as highlighting the conditions under which the strategy might come under pressure.
"Can we look to devise a contract outlining why the strategy has been chosen, the key things that might go wrong and what happens if that situation arises," he says. "We need more transparency and such an approach might work. If you are looking after other people's money then you need to be accountable and developing a good level of reporting will help."
According to Pedersen trustees need to challenge their advisers when it comes to implementing new investment strategies to ensure the approach taken is truly the right one for the scheme as opposed to just being the fashionable choice.
"Trustees need to be more selective and ask themselves whether the ideas they are being presented with are aligned with what they want to do in the long term," he says. "Over the years the role of consultants has changed and you could ask if their interests are now more aligned to fund managers rather than their clients. Many trustees look at their consultants as someone who looks after you but times have changed. Today's consultants have revenue targets now and need to sell investment ideas to their clients."
According to Pedersen trustees need to focus on ensuring they have long investment strategies in place that will work for them in the long term rather than being sucked into changing investment strategies more regularly.
"You have to take advice but you are not obligated to act on it and maybe the regulator needs to make that clear," he says. "You shouldn't have to be an expert in investment strategy to be a trustee but if you are changing investment strategy every three years then that is exactly what you end up having to be."
Squire Patton Boggs partner Judith Donnelly agrees that trustees need to be more discerning saying that "just because something is marked out as being the market standard just means that everyone else is doing it and that doesn't automatically make it a good idea," she says. "Trustees shouldn't just accept what they are being told and it is useful to remember that good advisers want to be challenged. They are happy to have a debate and so trustees shouldn't be reluctant."
She continues: "They should also be questioning their advisers on what they are doing to get the best deal for them. By adopting such an approach you can make significant cost savings."
So while there are signs that some trustee boards are taking a more challenging stance with their advisers it is clear that many still have some way to go. However, by pushing their advisers harder trustee boards stand to gain from significant improvements to their scheme in terms of the strategies and terms they are offered.
"Issues like fees and charges are not being discussed and they need to be. If you are a steward for other people's money then you need to be bringing these things up," says Pedersen. "Don't just do what you are told. If you continue to challenge your advisers they will need to come up with ideas that work for you."
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