King Canute was canny. When expectations about his Kingly powers exceeded his capacity he took his courtiers to the sea and demonstrated his incapacity to stop the tide from overwhelming his throne which he had placed on the beach.
Pension Fiduciaries should be canny and manage our expectations in much the same way. There is no way that a trust body or a Fiduciary Manager can protect members from the kind of market catastrophy that happened following the collapse of Lehman in 2008. We can no more buck such a market as stop a tide.
But Canute was cute enough to demonstrate there were areas of Government that he could influence and the part of the “beach” story that is sometimes forgotten is that he was able to demonstrate his value once he had rid himself of the false expectations of his courtiers.
While Fiduciaries cannot stop a collapse like Lehman’s , they can immunise their fund from exposure to concentrated risks (such as having Lehman’s collateralizing all your derivatives.
However, to exercise control over your investments, you need to be able to command the attention over those who manage them and in an industry where supply chains are long and delegated authorities numerous, it is not surprising that accountability is hard to get.
Some of our largest funds like RTZ and Shell still run their own investments precisely for this reason. There is direct accountability to trustees from the scheme’s CIO. But most Trustees will use fund managers to deliver them returns and most fund managers will delegate most of the operational decisions to their back office who in turn will appoint outside brokers. FX dealers and derivative specialists to exercise their trades.
Which makes it hard for the Trustees or even the fund managers to have much control of what’s going on. In fact, it takes an expert to audit the trades of large funds to discover whether they are being done efficiently or inefficiently.
My colleagues at Novarca reckon that the difference between a well operated fund and badly operated fund is 0.4% and when you are only expecting a fund manager to get you real performance of 2%, 0.4% is like putting up the high jump bar by 20%!
Returning to my friend Canute, he realised that he couldn’t control the tides but he could stop people drowning because of them.
He was King, he ruled the lot. Canute had grunt and he used his powers wisely. If he had left the job of governing his lands to his courtiers then there would have been anarchy.
Stong collective governance that knows what it can control and what it cannot and ensures that decision making is centralised around those who understand the complexities of the decisions is what is needed in pensions.
In this I am with Gregg McClymont and the Labour party who call for a reduction in small trust based schemes and an aggregation into large schemes. Large schemes have the grunt in terms of fiduciary knowledge and understanding and in terms of getting the attention of those who manage the money.
If we are to become as effective in the management of our pension funds as our German and Dutch cousins, we are going to have learn the lessons of Canute and concentrate our governance though centralised channels focussing on things we can do something about.
This article first appeared at https://www.pensionplaypen.com/top-thinking/show/90/king-canute-the-canny-fiduciary.html