Roger Brown suggests four ways trustees can enhance their probability of selecting the right adviser
How difficult is it to select an investment adviser for your DB Pension Scheme? If you read the latest Competition Markets Authority's (CMA) trustee survey you would get the impression that it's easy. Around 81% of trustees said they find it either ‘very easy' or ‘fairly easy' to compare fees when selecting an investment consultant. It's the same trend when it comes to assessing the quality of proposals and performance.
However, data provided by the CMA, in its fees and performance working paper issued in March 2018, provides a different picture. It states that "based on the information provided in tenders, it is very difficult to compare the fees of alternate providers on a like for like basis" and "it is impossible to compare firms' performance".
So who is right?
Evidence from the last 10 years suggests the CMA has a better grasp on things than the trustees who offered opinions to its survey. Funding levels of DB schemes, surely the acid test, have fallen from 97% to 91% over the past 10 years despite sponsors injecting £120bn in deficit recovery contributions (Source: Purple Book).
The main responsibility for this poor outcome must sit with the advice provided to pension schemes, to judge by the TPR's Trustee Landscape Survey, which found 68% of respondents either ‘never disagree' or ‘rarely disagree' with their investment consultant. Armed with this advice, trustees think they are making the right decisions. But the opposite is often the case.
Lay trustees lack the information to pick winners, partly because investment is such a complex area to assess. Giving yourself the best chance of selecting the right investment consultant to provide strategic advice and select out-performing managers should materially improve the long-term performance of your pension fund, but how can this be achieved?
The best way to look at any problem, is to break it down. Compiling a list of action points is a great way forward, as described in The Checklist Manifesto by Atul Gawande. The book explains how the airline industry has developed an enviable safety record by providing a list of checks which need to be carried out before aircraft take off.
Whether trustees are informed, or badly informed, there is no reason why pension schemes shouldn't fly more safely by following the right plan.
To help them on their way, I would suggest four ways in which trustees can enhance their probability of selecting the right adviser, arguably the most important task of all.
1) Clearly document requirements. It is often difficult for trustees to consider how they could enhance their investment governance when they are so steeped in their current governance approach. Recognising the potential of other possibilities, which a trustee board may not even be aware of, is virtually impossible. It is like setting your criteria for buying a new car with no idea what features other cars may have! Independent trustees that work for a number of pension schemes, or third party evaluators can be of significant help in providing a wider perspective.
2) Carry out thorough due diligence of potential providers. The main focus of this due diligence should be on the approach to strategic asset allocation and strategic risk modelling, since this is where most long-term value is added. There is no escaping the time and effort this requires. IC Select recognises this and addresses it by carrying out due diligence on an ongoing basis. This is made up of 50-60 hours of desk-based research on each adviser or fiduciary manager in addition to formal and informal meetings with each firm.
3) Ensure tender responses are specific to the needs of a fund. Tenders that provide information on what the consultant will do for your fund, as opposed to generic information on their firm, will not only be more interesting, but also more likely to lead to a better selection.
4) Use templates where possible. By requiring tender respondents to supply information, where appropriate, in templates will make information more easily comparable. This is particularly useful when requesting information on fees.
Given the importance of selecting the right adviser to the long-term performance of a fund, the due diligence and approach to selection should be at least as robust as when selecting a fund manager.
It is probably easiest to achieve this by accessing appropriate advice and delegating the required due diligence to a third-party. Finally, trustees should seek comfort from a section 36 letter so they can demonstrate, if required, that they took appropriate advice for such a significant appointment.
Roger Brown is founder of IC Select
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